There is no shortage of advice that investing is more successful when it is conducted with a long-term objective. The reason often cited is the power of compounding, and that is a very powerful reason. However, there is another subtle, but extremely powerful reason why investing with a long-term horizon is more beneficial that most people realize.
Warren Buffett was recently being interviewed and was asked a question about currency exposure given Berkshire Hathaway's (BRK.A) (BRK.B) extensive network of business that is conducted around the world. His response may shock you. Buffett essentially remarked that he really has no clue about the currency effects on Berkshire's various businesses. Buffett wasn't being modest, he was being honest: he simply cannot assess it. More striking, Buffett didn't seem concerned. And there is a reason for that.
When you are investing or buying a business with the intent of owning that business for years or decades, your focus rests solely on its fundamental attributes. When Buffett plowed 20% of Berkshire's book value into Coca-Cola (KO) 30 years ago, he couldn't have cared less about the effect of the British pound, the Russian ruble, or the Iraqi dinar. And over the past 30 years, Coke's incredible performance was not related to currency effects, but rather volume growth. Sure, there may have been certain years where currency translations were harmful to results. But over time, those issues matter less and less.
And that is the subtle, yet powerful benefit of long-term investing. A long-term perspective allows you to eliminate or rely less on factors that are minor over time. Investing becomes a lot easier. Think about my last statement carefully -- investing becomes a lot easier.
Long-term investing lets you think solely about the business and ignore macro factors that no one has any ability to predict accurately all the time. History proves my assertion correct. If you look at great performing companies over the long stretch, their investment performance has been solely due to business performance; nothing else. Look at Action Alerts PLUS charity portfolio holdings Apple (AAPL) over the last decade (product development) and Google (GOOGL) (increased search volume), or at AutoZone (AZO) (profits and share buybacks) -- and the list goes on.
Of course, the cherry on top is the capital accumulation, which increases exponentially thanks to compounding. So next time you yawn when someone mentions long-term investing, think about the more subtle benefits that a long-term perspective provides.
