There’s profit in patience

As algorithmic trading has grown in popularity, the number of fundamental investors has decreased. Long-only, fundamental investors now comprise just 7% of the total market value of daily trading. Rules-based, high frequency or hedge fund traders represent 75%. While short-term investors exist for a reason — often to exploit market mis-pricing or inefficiencies — their objectives are not the same as average investors looking to build wealth for retirement. And because the average holding period for a high-frequency trader can be as little as seconds, we now see a persistent and immediate reaction to market events, headlines and macro developments — factors all that wouldn’t necessarily impact the thesis for a long-term investor.

True, short-termism has produced many benefits. It has, for example, played an important role in increasing market efficiency. But it’s also come with a number of hitches. To cater to the growing number of short-term investors, sell-side research providers have become more short-term focused and marginalized the potential opportunities to be found in longer-term investing.

Short-termism also influences many corporate management teams. A byproduct of short-term thinking has been increased pressure to prioritize short-term performance, such as hitting quarterly earnings expectations, over long-term strategies. While companies managed quarter-to-quarter may hit their short-term targets, it’s often at the expense of long-term competitiveness. The irony here is that recent research shows that long-term focused companies outperformed their short-term peers on several important financial measures, and created significantly more jobs Opens a new window.. They delivered 47% higher revenue, 36% higher earnings, 81% greater economic profit and were 50% more likely to be in the top quartile or decile of their peer group.

Companies that maintain a long-term focus often outperform their short-term peers and create significantly more value for shareholders. Similarly, as most investors are now distracted by day-to-day noise, investors that look beyond the short-term can profit from overlooked opportunities.

Long-term investors interested in businesses with sound fundamentals find themselves in a favourable environment. Fundamental investors who have a better understanding of corporate strategy through extensive due diligence and in-person management meetings can more easily identify companies with promising long-term strategies. Partnering with an experienced asset manager can help investors take advantage of this opportunity.

At CIBC Asset Management, we believe that the most sustainable source of long-term equity returns is from earnings growth. We look through the noise and remain disciplined with a long-term focus, supported by confidence in the ongoing financial productivity of a carefully selected, diversified portfolio of assets. We’re committed to providing market insights and research to help you find the right investment solutions. If you'd like to discuss this market and economic update in more detail or have questions about your investments, get in touch with your advisor or CIBC representative anytime.

Daniel Delany and Matthew Scherer are investment advisor representatives with CIBC Private Wealth Advisors Inc., a sub-advisor to the CIBC International Growth Strategy offered by CIBC Asset Management.