Now no confusion on what is short term investment and what is medium term and long term!
Read our unique classification of investment based on duration or period of investment.
Plan your investing activity based on our unique classification of investment based on duration of investment.
THE CONCEPT OF SHORT TERM, MEDIUM TERM, LONG TERM AND LONGER TERM INVESTMENTS:
Many (most in fact) investors are confused about equity investments. Main reason being the volatility of markets and the investor’s inability to manage his emotional response to it.
Other than psychological/behavioral aspects, the investor is also devoid of basic understanding as simple and as basic as ‘what is asset allocation?’ and “what should be called long-term investing and what not?”
Here in this article we have clearly explained the classification of equity investments on the basis of duration of investment. The classification mainly include the
usually known classification of short-term investing, mid-term investing, and one unique but vital and important concept of ‘longer term’ investing which is mainly based on premises of life-long investing and investing philosophy of Warren Buffett.We classify investment into 4 types when it comes to period or on duration basis.
Short-term investment: (duration 3 months to 1 year)
Short term investment is basically nothing but trading because there is nothing like investing when we talk about it using word ‘short term’. However we call it ‘investment or short term investment’ and we have put it as that type of investor who buys stock for a holding period of minimum 3 months to maximum 1 year. To standardize and clarify the classification types of investment on durational basis we have had to mark the 4 types into months to months time period.
We have put the minimum time frame of holding stocks to qualify it for short term is 3 months and up to 1 year. Above 1 year will become medium term investment. The logic behind this is that a period of 3 months is bigger when compared to intraday trading or futures trading which is mainly based on month to month expiries. also the upper cap of 1 year is placed to freeze it as short term duration investment because above one year holding puts an investors into events involving taxation issues, dividend payouts, voting in annual meeting, declaration of annual results of the firm, and so on which is mainly accepted and expected by an investor who want to hold stock for more than 1 year (which we classify as medium term) Thus, one investing as ‘short-term investor’ according to our classification will limit his or her investment up to around one year as he is not interested to give the stock and in turn the company one year cycle and don’t want factors which can come up over one year time duration of certain nature as annual meeting and so on company side and taxation issues on his personal side; to affect/influence his stock investment which is in fact based on short term factors of analysis and also bringing results in short term which according to us we have put at 3 months to 1 year.
Medium term investment: (duration 1 year to 3 year)
Medium term investment duration is defined by us as any type of investment which is held for more than 1 year but not more than 3 years. As more than 3 years up to 5 years.
We call this type of investment as medium-term duration investment as the characteristics of completion of economic or stock market cycle is absent from this type of investment mentality. Thus, we would not like it to call as long-term investment if one is invested for even 2 or more years but less than 3 years. However most market analyst and investment advisors will tell it as long term investment as most of them believe anything above 1 year is long term investment, which we do not agree as per our theory presented here.
Long term investment: (duration 3 years to 5 year)
The period of 3-5 years is in general what is called to be long-term investment by the investment community. The basic premise behind such belief and argued logic is that an economy sees a cycle turn in about at least 3 years to 5 years. Same can follow about stock market movements also.
We also follow this and put a tag of long-term investment to any investment held at leas for 3 years and up to around 5 years.
It is advisable that an investor undertakes comprehensive portfolio review and shuffle at his/her investment at this turn of duration.
Longer term investment – duration minimum 10 years and beyond
Our this completely new coined word follows the investing duration and point of view adhered by warren Buffett.
For him the ideal holding period of investment is ‘forever’. He likes to buy stocks that he can hold forever. his this belief follows concept and principle of value investing in which investing in stocks is viewed as buying a part of actual business and not the shares that are quoted and traded on stock exchanges. He buys undervalued stocks of very selected sectors and businesses having particular characteristics and similarly avoids some sectors and businesses on counter basis.
Every body knows and hears about investing for ‘long term’ and ‘long –term ‘investing is good and so on. But no analyst or educator has clarified between what should be termed as ‘long-term’ and what shouldn’t. Also none has clarified on what is should be called when a person buys stocks for holding 3 months to one year (which we clarified in short-term investment). You will hear on tv and read on newspapers mostly about 1 year and 3 year and 5 year timelines when it comes to investing.
Getting back to understand the concept of ‘longer term investment’, one thing you understood that it is alike warren Buffett style approach when it comes to the duration of holding. To define it in years we put any investment holding held for 10 years and more as longer-term investing.
The duration of 10 years is beyond and above the usual economic (viewed in interest rate cycle terms mainly) and stock market cycle (bull top outing and bear bottom outing) Thus it surpasses the notion that the investor was looking for cyclical gains or considerations as in long-term investment.
The long enough duration of 10 years also makes it possible that the cost price of the original investment to become nil or zero on account of the return from dividend payouts and stock price appreciation from the stock.
In 10 years the company may consider to delist itself from stock exchanges, the company can come with new products, mergers, amalgamations, takeovers etc. all envisagable and imaginable outcomes and events are possible during such a big duration. So thus the investor has really invested for longer-term’ that is here 10 years on valuations fit to him for such a duration under such considerations.
the investor who is investing for such a longer duration mainly have ‘speculative’ element completely absent in his investment decision, as he is not eying benefits out of stock price or some short term events but completely and solely interested only into the average and fundamental and mature growth of the company as can happen over such a long period a decade and more.
The readiness and ability and confidence to invest and hold for 10 years and more comes from following the tenets of value investing like warren Buffett. Thus, the investor is confident of buying the stock at considerable discount price and ready to average at declines and deem declines as opportunity to buy more of them.
…we will update more comments in this article as and when…
