Discover more from Theory A : Visualize Value Investing
Why Long Term Holding is Bag Holding
A core tenet of Warren Buffet style “value investing” is holding onto assets for a long period of time. It’s considered the smart, rational, and pragmatic way to invest.
However for most retail investors end up bag holding when this strategy is not combined with the right research tools.
This is because what we choose to buy is influenced by our information environment such as reddit, twitter, news, and other forms of social media.
These assets contain both long-term value based on fundamentals, and also short term value based on its popularity and virality as a meme. The long term value slowly grows over time, but the short term value rapidly decays.
Value investors want to accumulate assets when the price purely a reflection of its long term fundamentals. Short term traders are willing to buy high but want to flip at a higher price before the short term value decays.
When long term investors buy viral assets but don’t trade, it’s similar to buying a ticket to Disneyland without going to it or selling it.
It’s like when every pastry shop started making cronuts. As long as the fashion trend holds, the increased margins allow everything to be more expensive yet still make money. This is why the market price is “correct” for stocks meme stocks like Game Stock and Bed Bath & Beyond. Traders are still making money selling to willing buyers who are often times other traders trying to making money selling to willing buyers who are often times other traders….
Hopefully Holding onto Hype
A typical trap a retail investor trying to mimic Warren Buffet falls into is thinking “I’ll hold onto this forever, ArtificialIntelligenceCryptoBlockchainVirtualReality is the the future so as long as I don’t sell, I’ll make money”.
And while sort of true, the reality is that very few people are willing to watch their asset drop by 80% and hold for years waiting for it to recover. Every year spend bag-holding is a year of feeling like an idiot and not being to buy the things that matter like a house, car, education, financial freedom, etc…
What they’re doing is that they’re using a partially understood ideological virtue to justify their purchase. It’s like buying luxury bag and claiming it’s worth it because of the “quality”. It’s not wrong because luxury items do often have higher quality, but the majority of the price comes from fashion momentum and artificial scarcity.
This is the most dangerous element of value investing as a partially understood philosophy, it allows investors convince themselves that they aren’t buying into the hype even as they end up bag holding it for years.