In a world where online betting and prediction markets are becoming pervasive, long-term investing is becoming a lost art. No doubt, the world is changing faster than we have ever seen before. However, that might be why long-term investors could stand out.
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Why long-term investing can stand out in the modern world
Many investors have shifted to making fast bets and quick profits. If that is what consensus is doing, how does an investor possibly get an edge over the market? By taking a path that most investors are no longer interested in.
Today, many investors confuse speculating from investing. Speculating is buying a stock or investment in the hope that you will get a higher price in the next day, week, or month ahead. However, you are completely subject to the market’s whims and volatility.
Investing means you invest in a tangible, real business. The wisest investors treat a stock like a private business and intend to hold it regardless of what the market does. Is the business growing? Is it generating profits and cash flow growth? Does the business have strong managers and competitive advantages that support growth and profits?
If these answers are yes, then why would you trade in and out of the stock? The stock market can at any one time undervalue or overvalue a business. However, over the long term, stocks follow the trajectory of their profits and cash flows per share.
Long-term investing is really a much more bucolic and less chaotic investing style. You choose your company, monitor its results, add on dips, and hold as long as its fundamentals keep performing. It allows a stock to compound earnings over years and decades. The less activity generally means the less trading cost you are exposed to (commissions, taxes, and opportunity costs).
Aritzia: A picture of why patience and fundamental value win
If I was contemplating long-term investing, Aritzia (TSX: ATZ) stock presents an interesting story. This is one of Canada’s best-known retail success stories. Its stock is up 507% in the past three years and 653% in the past 10 years.
That is a 22% compounded annual total return, which is exactly the type of annualized return a long-term investor would want.
However, these returns came with substantial market volatility. In the past three years alone, Aritzia has 10 drawdowns of -10% or worse. One of those drawdowns was -40% and a recent drawdown was -30%.
Any of these would make the most stoic investors a little jittery. Despite what the market did, Aritzia compounded revenue by a 19% compounded annual growth rate. Earnings before interest, tax, depreciation, and amortization (EBITDA) and earnings per share both compounded by a 20% annualized rate.
In fact, after the stock dropped 30% in the past few months, Aritiza just delivered an exceptional fiscal second quarter. Net revenues increased 44%, comparable sales rose 35%, and earnings per share rose 203%! It was rewarded with a 20% bounce back.
The market doubted Aritzia’s growth trajectory in this uncertain economy. Yet, patient long-term investors knew that the trajectory for the company remains solid. They either held or loaded up on the dip.
The takeaway on long-term investing
Aritzia has a huge market to gain in the United States. That is even before any European or Asian expansion. As long as it keeps delivering fashion that consumers readily embrace, Aritzia is a good stock to keep holding.
No doubt, the market will continue to swing it up and down. However, if it keeps executing and compounding shareholder value, you can expect many more new highs ahead.
