Understanding your time horizon is both quite a personal process and quite an important aspect to either investing or trading.
In a way, it is your individual positions' aggregate time horizon that actually dictates whether you are a trader or an investor. If you're only holding positions for the short-term, you are a trader making trades and should be using the toolkit available to traders (technical analyst, etc). If you're holding positions for the long-term, you are an investor and should be using the toolkit available for investors (fundamental analysis, valuation, etc).
This is not a new point. I have made this point in numerous presentations, interviews and articles. I merely reiterate it here as a prologue to an interesting debate:
How long is long-term?
Before I answer this, let's step back a moment and look at the (theoretical) bigger picture.
A business is the interaction of people, processes and assets combining in a coordinated approach to creating economic value by satisfying some form of demand in the economy. A key ingredient in this mix is "people". Without people to use them, assets would sit around worthlessly. Without people to perform them, processes could not leave the very page they were written on.
Hence, people really are businesses. Management run people. And the CEO runs management.
Thus, when you invest in a listed business's shares for the long-term, after all the research and after all the valuations in the world, you are buying into the ability of the CEO to deliver.
In an interesting annual study done into CEO tenures in the States, the long-term trend is towards a shorter and shorter tenure. More pointedly, in 2012 the average tenure of a CEO in the States dropped to 8.4 years.
I would venture to say that our local market's average (and trend, particularly in mining CEOs!) is likely roughly in line with that length. But, don't forget, this average period of CEO tenure is just that: an average. I would go further to venture a guess that CEOs of successful companies stay in their positions longer than CEOs in unsuccessful companies. As Eric Schmidt, the former CEO (but not founder!) of Google, once said, "If you're offered a seat on a rocket ship, get on, don't ask what seat."
Now armed with these facts and insights, answering the question of how long is long-term becomes fairly obvious: currently is about 8.4 years.
Well, alright, this is a massive oversimplification, but it does serve to illustrate the point I am trying to make. While trading is worried with short-term stock movements, investing is more worried about long-term company direction. And, in the long-term, it is the CEO that should form the company strategy and guide the company's capital allocation decisions towards a better outcome.
So two thoughts come to mind at this junction.
Firstly, it makes sense to always re-evaluate a stock you are holding once there is a CEO change. Will the new CEO change the strategy? How? If not, why not? While a change in CEO may not dictate a change in investment decision, it certainly should trigger an evaluation thereof.
Secondly, perhaps it is not a CEO that makes a company, but a CEO that picks a company. The underlying truth of what Schmidt said about accepting a seat on a rocket is that Schmidt did not actually build Google (nor probable add much lasting value to the business beyond "investor confidence" in a legit CEO), but he did pick the right company to jump on board as a CEO.
As much as I have lyrically waxed on about CEOs earlier in this article, I do think that some CEOs view their careers in the same way as we view our investments: pick a winning company and then back the winning company. It is not so much that the company picks the right CEO, but the CEO picks the right company to be associated with. If in the process they just happen to look good and get a load of bonuses and share options, well then they surely can't be blamed...
This has been a bit of an abstract article, but I do hope its stimulating some thoughts. Before I end the article, though, I want to make one last point.
I find the cliche perspective that the time horizon for long-term is "forever" quite misleading. This appears largely built on the over-quoted Warren Buffet saying how his "...favorite holding period is forever." I absolutely disagree. In fact, I find this a oversimplification perhaps only for the purpose of getting quoted (much like the Internet has "link bait", I see a lot of "quote bait" in what Buffet says).
As time goes on, staff in a company retire and get replaced with new staff with new agendas and new ideas. This includes management and, certainly, the CEO. Also, markets change and technology leapfrogs in unexpected directions creating new business models and, certainly, killing old ones.
An excellent business today will be a completely different animal (for better or worse) in fifty years time. If it even exists then. A succession of CEOs would have left differing legacies by then, as the natural staff turnover implies that you have a brand new workforce and the dynamics of the (global) markets means that the world is simply a different place.
Logically, should you not keep re-evaluating your investment? And, logically, this could lead to you exiting it.
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