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Today, we'll discuss time horizons in investing, specifically how they’ve shortened in the digital age.

All this, and more, in just 4 minutes to read.

— Matthew

Quote of the Day

"Wisdom begins in wonder."

— Socrates

Together With Masterworks

Through COVID, soaring inflation, and today’s crushing interest rates, a group of enterprising investors have collectively entrusted one billion dollars from their portfolios to Masterworks’ art investing platform.

Why? Because the contemporary art Masterworks offers—from legends like Picasso and Banksy—has demonstrated a low correlation to the stock market, inflation resistance, and exceptional appreciation potential. Not to mention Masterworks has completed 23 successful exits to date, distributing over $60+ million in net proceeds to investors in those offerings.

These investors didn’t need art expertise to diversify with blue-chip art, because Masterworks does all the heavy lifting, finding artists with appreciation potential (buying <3% of works offered) and then breaking an art offering into shares for you. If Masterworks sells a piece again for a profit, investors get a return. With 3 illustrative sales, Masterworks investors have realized net annualized returns of +17.6%, +17.8%, and +21.5%.*

What Else We’re Into

📺 WATCH: 20 rules for markets and investing

🎧 LISTEN: Betting big on China and bear market lessons with Richard Lawrence

📖 READ: Do it your way, by Morgan Housel

Trivia

Time Horizons: Short Term vs. Long Term

Getting rich slowly

Jeff Bezos once asked Warren Buffett why people don't follow his investment advice, especially since it’s so simple. Buffett's response? 

“People aren't comfortable getting rich slowly.”

From years to months

For years, the world’s most successful investors have underscored the value of the long-term view. While many market participants think in weeks, months, and years, elite investors often think in decades. “Our favorite holding period is forever,” Buffett has said. “Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” To the Oracle of Omaha, that’s how compounding works its magic. 

The average time horizon for individual and institutional investors has shortened drastically over the past few decades. In the 1980s and 1990s, many institutional investors — particularly pension funds — adopted long-term strategies. In the 1970s, the average holding period for stocks in the U.S. was about seven years. Yet a gradual, big shift has occurred: The average holding period has fallen to about six months today.

Impatient to patient

Market researchers and analysts say technological advancements and changing market dynamics are to blame. One of the primary drivers of the shortened time horizon is the rise of high-frequency trading (HFT) and algorithmic investing. Advances in technology allow institutional traders to execute millions of trades in microseconds. Individual investors can easily access all kinds of news, pricing, and data at their fingertips 24/7, likely prompting some investors to buy or sell more quickly than they otherwise would. 

A JPMorgan study found that much of today’s volume is driven by short-term trades, not fundamental analysis. JPMorgan found that "only about 10% of trading is now done by fundamental discretionary traders, and the rest is by quant funds, high-frequency traders, and market makers."

The shift has been driven in part by the ability to execute rapid trades at minimal costs and by the rise of quantitative strategies that focus on short-term arbitrage opportunities rather than long-term value. Social media’s rise — Twitter/X, Reddit, TikTok, etc. — has further exacerbated market short-termism. 

Day trading’s popularity soared thanks to social media, meme stock mania, and commission-free platforms. Some participants are less concerned with long-term fundamentals and more focused on short-term gains. As Buffet has said, "The stock market is a device for transferring money from the impatient to the patient." 

Another factor is the increased pressure and scrutiny on corporate executives to deliver quarterly results that satisfy Wall Street’s "what have you done for me lately" expectations. Executive compensation structures also reward short-term stock price increases, exactly the opposite of the Buffett mentality.

"Do not take yearly results too seriously,” Buffett has said. “Instead, focus on four or five-year averages.”

The greatest edge

At first glance, the explosion of exchange-traded funds (ETFs) might sound like a solution to extend investors’ time horizons. But the evidence is unclear, and, if anything, they might allow investors to remain short-term oriented because of their low costs and flexibility.

A study by the CFA Institute found that many ETFs have an average holding period of less than one year. That added to the case that the shift from active stock-picking to passive, index-tracking strategies has led to more frequent trading and reduced the focus on long-term ownership.

The trend toward shorter time horizons isn’t without risks. Frequent trading can drive increased volatility, higher transaction costs, and the potential for large drawdowns during market corrections. Investors focused on short-term gains may also be more prone to emotional decision-making, leading to suboptimal outcomes.

"The single greatest edge an investor can have is a long-term orientation," Seth Klarman once said, adding that investors who focus on the long term are better positioned to weather market fluctuations and capitalize on opportunities when others panic.

Watching paint dry

Technological advances and accessibility have undoubtedly made investing available to more people. A bigger share of the population can grow their wealth and participate in the rise of corporate America, and innovation.

Yet as markets become more dominated by short-termism, the wisdom of long-term investing remains as relevant as ever. 

Will the trend of short-term thinking in markets continue as technology keeps evolving? It’s likely. More awareness of the downsides of short-term thinking could dent the trend, but short-termism doesn’t appear to be going anywhere. 

As the economist Paul Samuelson said: "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

Dive deeper

For more, read about time horizons and why they matter.

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^{*Past performance is not indicative of future returns. Investment involves risk. The content is not intended to provide legal, tax, or investment advice. No money is being solicited or will be accepted until the offering statement for a particular offering has been qualified by the SEC. Offers may be revoked at any time. Contacting Masterworks involves no commitment or obligation. Contemporary art data based on repeat-sales index of historical Post-War & Contemporary Art market prices from 1995 to 2023, developed by Masterworks. There are significant limitations to comparative asset class data. Indices are unmanaged and a Masterworks investor cannot invest directly in an index. Net proceeds distributed back represents the total liquidation proceeds distributed back to investors, net of all fees, expenses and proceeds reinvested in Masterworks offerings, of all works Masterworks has exited to date. See important Reg A disclosures at masterworks.com/cd.}

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