When the news is filled with drama, there’s an understandable impulse to act. When we’re feeling worried about events, it can feel better to make changes to your portfolio – to switch out of this sector and into that one, to second-guess the companies and funds you hold in response to whatever the macro backdrop and world events are throwing at us.
I understand the temptation. As an investor of many years, I admit there have been occasions when I’ve succumbed. However, I’ve come to realise this is often a mistake.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments and any income from them will rise and fall in value, so you could get back less than you invest.
Long-term investing is a bet on people
When I think about what we’re actually doing when we invest for the long term, we are not investing in interest rates, or Trumpism, or oil prices – we’re investing in people.
Specifically, we’re investing in management teams and how successful they are. We’re investing our money in these businesses, and therefore in whether these individuals running a business (or a portfolio of them) are genuinely exceptional allocators of our capital. This is what I find it’s useful to remind myself of, when things get ‘choppy’.
History doesn’t repeat, but it does rhyme. The disruptions change – a supply shock here, a new technology there, a geopolitical flashpoint we didn’t see coming. But the underlying challenge for management stays the same. How do you read a changed world and respond intelligently, without abandoning what made you good in the first place?
The companies that endure are the ones led by people who can do both things at once. They stay focused on their core competence, what they’re genuinely best at, while remaining clear-eyed when the world has shifted in ways that require adaptation. That is harder than it sounds, as it requires the discipline not to chase every new theme, and the confidence not to ignore the ones that matter.
When some investors feared the worst, and were wrong
Consider what happened when ChatGPT burst onto the scene in late 2022. ChatGPT reached 100 million users faster than any consumer application in history. The fear that rippled through markets was immediate and, on the surface, looked rational. Google’s search business, a key driver of Alphabet’s revenues, was about to be disrupted out of existence. Investors sold.
But look at how Alphabet’s management had prepared, and how they responded. They accelerated development of Gemini, their own large language model, integrating AI-generated responses directly into Google Search so that users received the conversational experience they were increasingly seeking, without leaving Google’s ecosystem.
Simultaneously, they had already been deepening the broader Alphabet platform, such as developing proprietary Tensor Processing Units (TPUs) that give the group a genuine hardware advantage in running artificial intelligence (AI) workloads and extending their cloud infrastructure accordingly.
Investors who sold on the ChatGPT headlines were substituting their own, perhaps incomplete read of the situation, for the judgment of a management team that knew its business, its technology stack, and its competitive options, far better than any external observer could. That’s often a bad trade.
Adapting without losing focus
The energy sector offers a different kind of lesson. The best operators over the past decade have not been those who tried to be all things – pivoting wholesale into renewables while simultaneously running complex fossil fuel infrastructure, satisfying no one and doing neither particularly well.
Shell was perhaps an example of a company that has refocused on its core competencies. While it would not have been able to predict supply disruption in the Strait of Hormuz, its broad reach across the supply chain means it can help customers secure access to energy while boosting its own bottom line.
Meanwhile, its diversification into other regions shows forward thinking. The Shell-led Liquefied Natural Gas Canada joint venture came on stream last year, and the recently announced acquisition of ARC Resources in Canada for $16.4bn is worth watching over the long term.
What we are really doing when we invest
The goal of long-term investing is to own stakes in businesses or funds, run by people who are skilled at navigating complexities. Teams who allocate capital with discipline can compound value over time, creating greater returns. Our in-house analysts of shares and funds endeavour to seek them out, and I urge readers to check out our insights.
The company’s weighting in an index will also increase, as the company’s value increases. This means that tracker funds, as well as skilled active managers, will capture success.
The risk of throwing the baby out with the bathwater is real. When we react to headlines by tinkering with what we hold, we often undermine the very advantage we were trying to buy – the judgment of people who are closer to the facts and faster to respond.