Benefits (and Pitfalls) of Long-Term Investing

Abstract

This paper outlines the benefits of long-term investing, as well as the pitfalls. Three key advantages held by long-term investors include: the capacity to adopt positions where payoff timing is uncertain; the ability to exploit opportunities generated by the actions of short-term investors; and latitude to invest in unlisted and/or illiquid assets. These advantages provide access to a broader investment opportunity set than available to short-term investors. Strategies suited to long-term investors include: capture of risk premiums arising from the actions of short-term investors; returns from liquidity provision; value investing; exploiting pricing discrepancies across segmented markets; long-term thematic investing; adding economic value to assets through engagement and control; investing in complex assets; and certain types of dynamic strategies. Pitfalls of long-term investing relate to their reliance on expectations about the long-term, when the distant future can be hard to predict; and vulnerabilities related to organizational, agency and alignment issues. Investing in illiquid assets and dynamic strategies are examined in detail.