Maximise returns: 5 things that long-term investors do differently

By Uma Shashikant

A frequent question asked by investors is: how long is long term? As a research student working with annual returns, I would have answered the question with the results of my number-crunching exercises. Having witnessed several market cycles since then, I would now say that long term is infinite. A long-term investor would want to hold on to his investments forever.

It's more about attitude than number. When we choose a career, we do not invest in ourselves hoping to 'cash out' some time soon in order to pursue something else. Even those who switch careers successfully give their all to what they do. They invest in their careers as if it was all that they would do for a long, long time. Long-term investing requires this attitude. What would we do differently if we were long-term investors?

First, long-term investors take the time to understand what they are doing and why. Those who buy an IPO because they have made money mostly by buying IPOs earlier are not long-term investors. They are only replicating a lazy tactic to make money. If there is no method to selecting investments, they are not longterm investors. Such people want to know all about the investments they are buying. They spend time and effort on learning, research and analysis. Many take offence when I tell them they have bought a stock or a mutual fund on a whim or a tip. I then ask them to list their investments and tell me why they bought those.

By the time we reach the fourth item, the truth is out. Most investors buy without adequate groundwork and think that if they hold it for a long time, they are long-term investors. This is not true.

Second, long-term investors understand that returns will be reasonable; they do not expect miracles. If they manage a multi-bagger stock or a winning fund, they know that in the process of acquiring this star, they have also bought a few not-so good investments.

They may have exercised the same diligence in selecting the latter. Despite this, all their investments will not rise and shine. Long-term investors know that there is no formula for picking winners, that they will be fine on an average, and hence, keep their return expectations normal. If they earn a return of 15-16% in the long term, they have beaten inflation, earned more than the bank deposit rates, and built reasonable wealth. Getting to this number involves a few losing picks and a few multi-baggers, and longterm investors know this is the process to build wealth. They do not insist that each investment earn a high rate of return every year.