THE CONCEPT OF SHORT TERM, MEDIUM TERM, LONG TERM AND LONGER
TERM INVESTMENTS: Classification of Investment based on duration/holding/horizon
Many (most in fact) investors are confused
about equity investments. Main reason being the volatility of markets and the
investor’s inability to manage his emotional response to it.
Other than psychological/behavioral aspects,
the investor is also devoid of basic understanding as simple and as basic as
‘what is asset allocation?’ and “what should be called long-term investing and
what not?”
Here in this article we have clearly explained
the classification of equity investments on the basis of duration of
investment. The classification mainly include the usually known classification
of short-term investing, mid-term investing, and one unique but vital and
important concept of ‘longer term’ investing which is mainly based on premises
of life-long investing and investing philosophy of Warren Buffett.
We classify investment
into 4 types when it comes to period or on duration basis:
Short-term investment:
(duration 3 months to 1 year)
Short term investment is basically nothing but
trading because there is nothing like investing when we talk about it using
word ‘short term’. However we call it ‘investment or short term investment’ and
we have put it as that type of investor who buys stock for a holding period of
minimum 3 months to maximum 1 year. To standardize and clarify the
classification types of investment on durational basis we have had to mark the
4 types into months to months time period.
We have put the minimum time frame of holding
stocks to qualify it for short term is 3 months and up to 1 year. Above 1 year
will become medium term investment. The logic behind this is that a period of 3
months is bigger when compared to intraday trading or futures trading which is
mainly based on month to month expiries. also the upper cap of 1 year is placed
to freeze it as short term duration investment because above one year holding
puts an investors into events involving taxation issues, dividend payouts,
voting in annual meeting, declaration of annual results of the firm, and so on
which is mainly accepted and expected by an investor who want to hold stock for
more than 1 year (which we classify as medium term) Thus, one investing as
‘short-term investor’ according to our classification will limit his or her
investment up to around one year as he is not interested to give the stock and
in turn the company one year cycle and don’t want factors which can come up
over one year time duration of certain nature as annual meeting and so on
company side and taxation issues on his personal side; to affect/influence his
stock investment which is in fact based on short term factors of analysis and
also bringing results in short term which according to us we have put at 3
months to 1 year.
Medium term investment:
(duration 1 year to 3 year)
Medium term investment duration is defined by
us as any type of investment which is held for more than 1 year but not more
than 3 years. As more than 3 years up to 5 years.
We call this type of investment as medium-term
duration investment as the characteristics of completion of economic or stock
market cycle is absent from this type of investment mentality. Thus, we would
not like it to call as long-term investment if one is invested for even 2 or
more years but less than 3 years. However most market analyst and investment
advisors will tell it as long term investment as most of them believe anything
above 1 year is long term investment, which we do not agree as per our theory
presented here.
Long term investment:
(duration 3 years to 5 year)
The period of 3-5 years is in general what is
called to be long-term investment by the investment community. The basic
premise behind such belief and argued logic is that an economy sees a cycle
turn in about at least 3 years to 5 years. Same can follow about stock market
movements also.
We also follow this and put a tag of long-term
investment to any investment held at leas for 3 years and up to around 5 years.
It is advisable that an investor undertakes
comprehensive portfolio review and shuffle at his/her investment at this turn
of duration.
Longer term investment
– duration minimum 10 years and beyond
Our this completely new coined word follows
the investing duration and point of view adhered by warren Buffett.
For him the ideal holding period of investment
is ‘forever’. He likes to buy stocks that he can hold forever. his this belief
follows concept and principle of value investing in which investing in stocks
is viewed as buying a part of actual business and not the shares that are
quoted and traded on stock exchanges. He buys undervalued stocks of very
selected sectors and businesses having particular characteristics and similarly
avoids some sectors and businesses on counter basis.
Every body knows and hears about investing for
‘long term’ and ‘long –term ‘investing is good and so on. But no analyst or
educator has clarified between what should be termed as ‘long-term’ and what
shouldn’t. Also none has clarified on what is should be called when a person
buys stocks for holding 3 months to one year (which we clarified in short-term
investment). You will hear on tv and read on newspapers mostly about 1 year and
3 year and 5 year timelines when it comes to investing.
Getting back to understand the concept of
‘longer term investment’, one thing you understood that it is alike warren
Buffett style approach when it comes to the duration of holding. To define it
in years we put any investment holding held for 10 years and more as
longer-term investing.
The duration of 10 years is beyond and above
the usual economic (viewed in interest rate cycle terms mainly) and stock
market cycle (bull top outing and bear bottom outing) Thus it surpasses the
notion that the investor was looking for cyclical gains or considerations as in
long-term investment.
The long enough duration of 10 years also
makes it possible that the cost price of the original investment to become nil
or zero on account of the return from dividend payouts and stock price
appreciation from the stock.
In 10 years the company may consider to delist
itself from stock exchanges, the company can come with new products, mergers,
amalgamations, takeovers etc. all envisagable and imaginable outcomes and
events are possible during such a big duration. So thus the investor has really
invested for longer-term’ that is here 10 years on valuations fit to him for
such a duration under such considerations.
the investor who is investing for such a
longer duration mainly have ‘speculative’ element completely absent in his
investment decision, as he is not eying benefits out of stock price or some
short term events but completely and solely interested only into the average
and fundamental and mature growth of the company as can happen over such a long
period a decade and more.
The readiness and ability and confidence to
invest and hold for 10 years and more comes from following the tenets of value
investing like warren Buffett. Thus, the investor is confident of buying the
stock at considerable discount price and ready to average at declines and deem
declines as opportunity to buy more of them.