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The dangers of a short-term view
All insightsA key tenet of the Stewart Investors investment philosophy is that we are long-term investors. We believe that the best way to preserve and grow our client’s savings is to invest for the long-term in high-quality companies that contribute to, and benefit from, sustainable development. This focus on being long term is important because it allows us to take advantage of structural growth opportunities that generate enormous value for our clients, without falling into traps of trying to time the markets or make short-term predictions about the macro-economic environment.
There is a saying that long-term performance is made up of sections of short-term performance. And while this is trivially true, it doesn’t mean that short-term performance provides any useful information about long-term performance. In fact, short-term performance provides much less information about long-term performance than might be statistically expected. That’s because in the short term, surprises will dominate stock returns, but over the long term those surprises tend to cancel out. It has been well documented that the volatility of stocks drops much more quickly than expected as investment timeframes lengthen – and that this effect gets stronger as the timeframe is extended1. In particular, the variance of the stock market returns at 15 years is half what would be expected based on a knowledge of 1-year returns.
This is particularly true for stocks that are exposed to business cycles. While we prefer companies in control of their own destiny that produce consistent, predictable, recurring earnings growth, most companies are affected in some way by some form of cycle, and we cannot select these companies with perfect foresight of cyclical effects. One company that helps demonstrate this is Infineon Technologies (Infineon).
Infineon is a German-listed leader in the field of power management semiconductors whose end markets and applications include data centres and artificial intelligence, electric vehicles, smart homes and buildings, robotics, and power conversion for renewable energy. While all these end markets and applications have structural growth tailwinds, their growth is neither linear nor smooth. Below is a chart of the stock price of Infineon in the year to 30 June 20242. Anyone holding the stock would have experienced return fluctuations of as much as 40% over the course of the year.
Infineon - stock price over 1 year
Source: S&P Capital IQ to 30th June 2024
Contrast this with the last 10 years (shown in the chart below), during which Infineon’s share price appreciated 270%, which equates to approximately 14% per annum3. Over those 10 years, Infineon has benefited from having a competent management team who are building a high-quality franchise. They have grown sales approximately 16%, free cash flow 16% and earnings per share of 25% per year4.
These figures refer to the past. Past performance is not a reliable indicator of future results.
Infineon - stock price over 10 years
Source: S&P Capital IQ to 30th June 2024
Given Infineon’s end markets, we consider that underlying demand for its products will remain strong and that there is plenty of potential to grow from here. The investment case for the company remains compelling as we expect the company to maintain its leading competitive position, its pricing power, and ability to gain market share. In which case, the short-term gyrations in the share price will have provided no useful information about the company’s long-term growth prospects, but they have provided opportunities to add the positions we hold for clients.
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