How to benefit from market short-termism

We would certainly like to. It is just not that easy in equity markets.

But this seems to be the approach taken by many listed equity market investors. Equity market turnover in most listed equity markets is over 100%. This means that the average investment period is around one year, often considerably less. Many equity market participants must then be trying to earn a quick buck by trading stocks, rather than considering themselves investors in underlying companies.

If you want to earn a quick buck in equity markets you are essentially speculating, you need to believe that you have some piece of knowledge that no one else has that will drive the price higher and allow you to sell your shares to someone else in the not-to-distant future. 

The problem with the quick buck approach is that it is harder than you think to pull off consistently. Not only do you have to accurately predict the future (something that research has proven that most fail at), but you also need to second guess the consensus view of the future. And yet most of the market appears to play this game. You need to believe that you are better than all the rest all the time - a tough ask! 

A good example of how difficult that is was the 2016 US presidential election. Market consensus was heavily biased to a Clinton win and most were positioned accordingly. However, some hedge funds had correctly predicted a Trump win but still lost money due to the surprising market reaction to the Trump win.

There is however another way to earn good returns from equity markets. You can use this quick buck approach to investing to your advantage. To benefit from market short-termism you do not need to be a rocket scientist. You need to:

1. be confident about the long-term intrinsic value of a company
2. have a sufficient margin of safety between the current share price and that value
3. have a lot of patience and a strong constitution
4. accept the world is an uncertain place and you will be wrong some of the time.

Points 1 and 2 are not as difficult as they sound. Quite often a quick look at the turnover of a company, its assets and liabilities can give you a rough idea on what it is worth. Companies can often trade at significant discounts to this rough metric because of short-term market concerns. Provided the company is not in a situation that could result in its failure, generally due to high levels of debt, a company will normally find a way through any short-term problems and its share price will ultimately reflect its long-term intrinsic value.

Points 3 and 4 are perhaps the most difficult. In the short run, there is no telling where the market will take a share price. Buying a company and seeing its share price drop 50% is never pleasing no matter how many times you have experienced it before. And it could be several years before you see any price recovery or decent return on your investment. Even then you will be wrong some of the time but provided you don't put all your eggs in one basket the returns from the winners should more than compensate for this.