Long term investing

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Since I started investing the one thing that crossed me highest number of times is advice to invest for "Long term". Though in all the articles I read the definition of long term was not very clear or was at east not consistent. So even today when some one talks about long term I get confuse .

though there are two things I have observed about long term investing.

1) If you press "ctrl F" and type Warren Buffet and then enter the chances are very high that you will find a match. it can be an advertisement of a book teaching you long term investment or some excerpts from some of his old interviews or an example on how he has made money

2) It reminds me of a story I read in 5th standard about five blind men touching an elephant, they all try to picture the elephant depending on what part they touched. the story holds true for long term investing as well. The term assumes different meaning depending on who is using it. I have met investors for whom long term was any thing more then a week to some one who says I never want to sell a stock.
what is more interesting is the answer changes depending on whether you are asking the question in a bear market or a bull market. for example in last one year, long term has changed,from about 6 months to 5 years.

also for most of the mortals it is impossible to predict the markets top and bottom, this include most of the people managing big money also. I say this because of the kind of smart money comes in the market just before the doom. Private equity funds collected for investing in real estate companies and in real estate were the highest just before the sub prime happened. Now private equity players are some of the smartest people in investing world. Still remains as vulnerable to markets. The same happened in 2000 when a lot of venture capitalists invested tons of money in anything that ended with ".com".

I am sure investing for long term is not the panacea for making good returns, there are "n" number of examples of this. Century Textile was a one time market darling (with most of other textile companies), which is way below its life time high and has seen two market reallies since then without the price moving closer to it's peak. Also some of the IT companies are miles away from their life time high they made in 1999- 2000, and I have my own doubts about the real estate companies going back to prices they were being quoted in 2007 (I am not saying that all of them will not come back but few of them will definitely perish, even if the company does well there is no guarantee the price will at least in the short term).

At the same time the other side of the story is of companies like Wipro, when the IPO hit the market it was not really received very well by the market, same happened with Infosys, IPO remained unsubscribe. If you discount all the bonuses, split and dividend the opening price was .89 Rupees. now it is about 270. this is a compound interest of about 38%. some other companies like Reliance, Infosys, ITC, HLL have given fantastic returns, the only catch is; When did you buy it and are you still holding on to then.

OK now it looks very simple, Identify the winners and get rid of losers, but then how many investors have done it in lat so many years. let me ask you a few questions.

how many investors have identified the industries whose time is over before the crash?

Did they sell HLL three years back? Or sold Infosys or Wipro around it’s peak saying it’s expensive? (At a PE of more then 500 companies should be considered expensive)
Got out of the market in 1992, 2000, 2007 because it was expensive?

How many would have agreed that Indian market was expensive in 2007? (Indian market had a PE of 25 whereas China was quoting at around 45 so Indian markets were cheap relative to Chinese markets)

How many of us are going to be proved wrong who thinks reality stocks will recover, or who do not think they will recover, or which stocks will/ not recover.

These are million dollar questions and one can loose millions if he get them wrong. Unfortunately no one knows the answers of these questions. You may claim to know but no one can guarantee. And just because you proved right does not mean you were correct. You can be just plain lucky, also just because you proved wrong does not mean you were wrong, you can be plain unlucky.

This is like reading a book on success. I am sure a lot of you would have read books on success. Those are mostly written by people who were successful. The author looks back and says I did following things that made me successful. I bet if you do all what he has mentioned, you can still remain unsuccessful. needless to say you may not do any of them and can still be successful.

Unfortunately many people start investing not because they think they can make money but because their neighbor is making a lot of money. This problem (getting influenced by neighbor) is not limited to retail investor but the biggest of the fund managers also fall prey of it (remember the number of real estate funds which were launched last year). It’s like saying my neighbor’s fever was cure by medicine “A” so I also start taking it. I just double the quantity and I still don’t have fever.

I do not want to get into preaching on what is correct and what is not. I am sure there is enough material available, and one can spend his entire life reading. Most of us who invest are smart enough to know what is correct for us.