I recently had an interactive twitter spaces session. Unfortunately, the first 30 min of the conversation was not recorded

I am posting the video below

https://www.youtube.com/watch?v=ucxiWhkvnG0

To link the questions and my responses better, I spoke about four assumptions in investing. We all make implicit decisions on these questions, but often fail to recognize it

Time horizon

The first assumption is the time horizon for each investment. We have labels such as traders or investors with traders having a shorter time horizon. These are lazy labels. Only a few investors are explicit about their time horizon for an investment. Is it 1-3 months, 12 months, 2-3 years or greater than 5 years?

Thinking on these lines is not an academic exercise and there is nothing superior about longer versus shorter time frames. Also, we cannot be sure about how long we will hold an investment, but we should have some viewpoint about it

Let me take a few examples to make this point

Assume your ‘average expected’ holding period is around 6 months. In such a case, you will be more concerned about the next quarter’s earnings, momentum in the stock and general economic conditions in the near term. You may use technical indicators more than fundamental factors to make a decision

In such a case a cyclical company such as steel or sugar is a good idea

In contrast, if you prefer a 5+ year holding period, you would be focused on the business model, competitive advantage, and quality of the management. You are more concerned about how the company will perform over the next decade and not the next quarter

A pharma or specialty chemical company could be a good idea even if there near term headwinds

One can easily see that an opportunity for one set of investors would be a nonstarter for the other. A lot of argument on social media is often two individuals talking past each other because their implicit time horizon is different

You don’t have to be precise about your time horizon but should have a general idea of the time scale you are operating on. That will define your type of stocks and the investing framework

Cyclicality

This brings me to next topic of cycles. I agree with the idea that in the end everything is cyclical. The only difference is the duration of these cycle.

An FMCG company could have a cycle of decades whereas a sugar company could complete its cycle with 1-2 years

One should combine the idea of cyclicality with time horizon. If you prefer to buy and hold for 5+ years, you must avoid a tier 2 steel producer. On the other hand, an investor with a 6 month horizon, would get frustrated if he or she buys a CDMO or a steady growth FMCG company going through a temporary slow down

Return on time invested

The scarcest resource for all of us is time. You can compound money, but time is finite and reducing by the second. If you accept that reality, then return on time invested is very critical

I will not get philosophical on this. For now, I will limit the discussion to what you are earning in monetary terms per unit of time spent on investing

I covered this topic in detail in the post below on why time spent on active investing has low returns

https://www.valueinvestorindia.com/2019/05/24/a-future-advise-to-my-kids/

Let’s assume that like me, investing is a passion for you. We all have activities in our life where we are not thinking of an economic return. Life would be a drab if we were economic animals all the time. That said, I think it is important to think of Return on time invested as a framework.

Let me give you an example – I used to look at arbitrage situations in the past but realized that increasing competition had reduced the return to low double digit one time return. It was not worth the time for me, and I stopped investing in such opportunities

The same goes for debt investing. I don’t want to spend time looking for the extra yield and add risk for that extra 2-3% return. I prefer to park my surplus cash into Fixed deposits with some large banks. It may be sub-optimal from a money standpoint, but better from a time perspective

I am not sharing these examples as a superior way of spending time. Someone else would feel that I have wasted 20 years of my life trying to beat the index. That said, I think we should all look at each investment opportunity through this lens

Sleep test or risk tolerance

I come to the final point. I have written about it in the past on the blog. The point is simple – Will an investment or level of concentration make lose sleep? If yes, then it’s not worth doing

This test works as a proxy of my risk tolerance. I don’t care what others think about an opportunity if it makes my stomach churn and lose sleep. We are all built differently and this question on risk tolerance will give a different and very personal answer. Trying to imitate others on this point is a sure way to unhappiness