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Investment Philosophy

Short-term or Long-term Investments right now… What’s Best for You?

A few investors recently reached out to discuss various investment strategies as we continue going through impacts from COVID-19. The main topics of discussion were centered around timing (invest now or wait) and should the investment be short or long term.

From a Single Room House to a $1.7 Billion Sale to Warren Buffett

These discussions reminded me of a fantastic book I recently finished called First a Dream that contains sound advice by legendary investors, Warren Buffett and Jim Clayton. First a Dream, written by Clayton and Bill Retherford, is the biography of Clayton who grew up working in tough farming conditions. As a young kid, Clayton worked and lived with his parents and brother in a single room home without plumbing, complete with cracks in the flooring that looked straight to the dirt below. This allowed cold winter air or hot humid summer air to flow freely onto the floor on which they slept. Clayton’s personal story is extremely interesting, and the journey of his company Clayton Homes is wonderful. In 2003, Clayton Homes, his then public company, sold to Warren Buffett for $1.7 billion, becoming one of the Berkshire Hathaway family of companies.

Invest in What You Understand

In First a Dream, Clayton talks about having a balanced portfolio without needing to diversify into many different industries. Clayton’s and Buffett’s investment philosophies are similar in that they only invest in businesses or industries they understand. They never make investments into industries or companies they don’t understand. Another major takeaway from their thinking is that a balanced portfolio is comprised of short-term and long-term investments that meet every individual’s goals and needs. They don’t believe in the wide net investment diversification approach that Wall Street and bankers try to sell. Buffett and Clayton also believe in the power of compound interest—which is when your interest is added to the principal sum so you not only earn interest on your principal sum, you earn interest on your interest.

Having a Balanced Portfolio

Short-term investments (usually held for one year or less) give you quick access to capital if needed. Long-term investments tie up capital for longer than a year but offer higher returns. Some investors want to invest in 5- to 7-year multifamily investments, but they also should balance their portfolio with short-term investments so they can access their capital quickly if needed. Investors make short-term investments to have access to liquidity if they need funds in 60 or 90 days, for example. That said, based on the current economic environment with low bond returns, a low US treasury rate, and banks paying maybe 0.5% Annual Percentage Rate (APR) on “high-yield” savings accounts it is challenging for investors to find short-term investments that provide quick access to their capital (aka liquidity) and receive a solid return on investment.

Summing Up…

In summary, every person or family is in a different phase of life with different investment goals or needs. So, there is no definitive blueprint for you to follow. It’s all about finding the right balance between your short-term and long-term investments and your short-term and long-term goals and needs.