On Long-Term Investing: Why the Hardest Part is Sitting Still

From the Desk of the CIO

Why do most investors fail? It’s not because they picked the wrong stock. They fail because they could not tolerate owning the right one.

While the intellectual work of investing (reading a filing, modeling a business, deciding what something is worth) is difficult, it remains largely learnable. The psychological work often isn’t. It asks you to do nothing while your account balance falls by a third, to buy when the news is worst, and to sit through years in which you look wrong. The latter is a phenomenon a number of prominent investors grappled with when they did exactly that just prior to the dot-com crash. Nothing in ordinary life trains a person for this. In every other domain, effort correlates with results. In markets, past a certain point, effort is the enemy.

The point of this piece is to make the case for the long horizon. It is to examine what the historical record actually shows, why activity destroys returns and how to tell noise from substance.

Up and to the Right

Let's start with the arithmetic, because the arithmetic is what everything else must survive. Over the twentieth century, the Dow Jones Industrial Average rose from roughly 60 to roughly 11,500. That single sentence contains two world wars, an influenza pandemic, the Great Depression, a dozen recessions, the collapse of Bretton Woods, oil embargoes, stagflation, a 22% one-day crash, and the constant, credible expectation of nuclear annihilation. It all sounds quite grim but zoom out and understand that despite all this, the compounded annual rate of return of the Dow over that period (before dividends) is a little over 5% per year.

If that sounds unremarkable, consider this: U.S. equities have returned roughly 10% annually in nominal terms over the past century, which works out to something near 6.5–7% after inflation. A dollar invested in a broad American index in 1980 and left alone would be worth well over a hundred dollars today, and the investor who achieved that didn't need an edge. They needed a pulse and an unopened statement.

The key phrase here is “left alone.” It sounds easy, but when someone tells you that the market has, historically, gone “up and to the right,” they are referring to a trend line, not the actual line. The actual line is not smooth. It never was, and it never will be, and that's an important detail because the average year contains an intra-year decline of roughly 14% peak to trough. The good news is that most of those years still finish positive. The bad news is that they sometimes don't, and when they don't, it can get ugly. For example, the S&P 500 fell 49% between 2000 and 2002, 57% between 2007 and 2009, 34% in thirty-three days in early 2020, and 25% in 2022, and yet we still find ourselves at all time highs in 2026.

The line will never be smooth.

Here is the historical fact that forms the basis for what I am trying to argue: there has never been a twenty-year holding period in the history of the Dow Jones Industrial Average or the S&P 500 with a negative total return, assuming dividends were reinvested along the way. Not one. Ten-year windows have gone negative. Twenty-year windows have not, so while time does not eliminate volatility, it certainly converts it from a risk into a toll (of sorts).

The Behavior Gap

If the index has done that well over time and we presently find ourselves at all time highs, why has the average investor done so much worse? The answer is that the average investor did not stay invested. Like it or not, the market's best days are the property of people who were still in the building on its worst ones.

Over a typical twenty-year window, an investor who stayed fully invested (i.e. "passive") generally earned the market return. An investor who missed only the ten best trading days in that window was significantly worse off. Ten days out of five thousand. 

And those days are not necessarily scattered randomly. They often cluster inside the worst stretches (often within days or weeks of the worst declines) because the same volatility that produces catastrophic sessions can produce violent recoveries like the ones we have been seeing over the past year or so. Selling to avoid the downside reliably forfeits the upside and is why market timing fails for almost everyone since getting out requires one correct call and getting back in requires a second. What makes it even more unlikely that an investor gets it right is that those two decisions have to be made under maximum psychological duress, at exactly the moment when every instinct and headline argue against it.

So what’s the solution?

Doing Less

In a world where gunslinging fund managers boast about market-beating performance, the managers who often do the best over long periods are those who spend the majority of their time doing very little. It sounds counterintuitive, especially when they are being paid to actively manage, but those who understand this behavior have been remarkably candid that their advantage is temperamental rather than analytical:

“Part of the Berkshire secret is that when there’s nothing to do, Warren is very good at doing nothing.” – Charlie Munger

Warren Buffett has described Berkshire's ideal holding period as “forever,” and famously characterized the firm's posture as “benign neglect, bordering on sloth.” That’s the operating model, and his career has been a showcase for the single most useful rule in behavioral finance: be fearful when others are greedy, and greedy when others are fearful.

It's true that Investing is a difficult thing to master, but the most identifiable reason for why people tend to fail is that patience is scarce and activity destroys value.

"Why" you ask? Because constant activity invites the frictions that will always be a part of investing that can chip away at the potential value of a portfolio, not the least of which, is taxation.

Frictions

Realized gains are taxed, yet unrealized gains are an interest-free loan from the government that keeps compounding. The less a portfolio is turned over, the less it pays in tax.

Second, is that each decision is a chance to be wrong. Furthering what we discussed earlier, an investor who executes a handful of strategic trades per year makes far fewer decisions than the investor who makes hundreds of trades per year. The more trades one makes, the greater the chance of making a mistake that can erode prior gains (realized or unrealized). And that's saying nothing of transaction costs that may exist depending on the asset(s) being bought and sold.

And finally, compounding is interruptible, and opportunity cost is the cost of that interruption. The power of compounding comes entirely from the sequence remaining as uninterrupted as possible and every exit resets the sequence. The entry that follows is where opportunity cost and reentry risk get paid. The returns that matter most are the ones you did not have to earn twice.

These three things are what individual investors and managers alike tend to miss, yet those who consistently outperform tend to do so when they mix the antidotes to these three "frictions" with superior asset selection.

Noise vs. Substance

The obstacle to sitting still is not laziness. It is that the modern information environment is engineered to make sitting still feel irresponsible, particularly if you're a professional manager. How could one sit and do nothing if “breaking news” is flying across the screen on CNBC? Understandable, but here’s a useful filter:

Substance changes what a business will earn over the next decade. Noise changes what someone will pay for it this afternoon.

Noise is the vast majority of what reaches you and is some version of daily price moves, macro forecasts (both of which have no demonstrated predictive skill but are produced anyway because the demand for them is infinite), quarterly earnings that miss by a penny, analyst upgrades/downgrades, and the word “plunges” in a headline about a 2% decline. Things that are designed to be consumed before dinner.

Substance is rarer and duller. Durable shifts in competitive position, capital allocation decisions by management, changes in unit economics or returns on incremental capital, regulatory or structural change that alter the shape of an industry and/or balance sheet deterioration. Substance usually arrives in filings rather than feeds, and it rarely requires a decision the same day you learn about it.

The Risks

An argument that acknowledges no counterevidence is often marketing, so here are some honest takes about the risks surrounding long-term investing:

1. “Stocks always recover”: this is a claim about diversified equity indices, not about individual companies. Patience applied to a failing company is not discipline; it is a refusal to update. The "recovery" piece often has to do with substitution rather than literal recovery since the committees behind these indices drop the losers and add the winners. For most people, the long-horizon case rests on the very diversification and index provides. For professionals managing money, it rests on being able to adjust when the investable thesis changes.

   
   

2. Geography is not guaranteed: Where you invest your money, matters. The Nikkei peaked in December 1989 and did not reclaim that level until February 2024. Investors in Japan practiced exactly the patience described above and were not rewarded within their working lives. The American record is exceptional, and reasoning from the winner introduces survivorship bias. Global diversification is a hedge against the assumption that the last century's leader is the next one's.

   
   

3. Valuation: Buying broad equities at historically extreme multiples has, empirically, produced below-average ten-year returns, and while time tends to make an elevated cost basis look acceptable, the degree to which someone overpaid will dictate how long it takes to make that investment look good.

And yet, none of this defeats the point I’m trying to make. Instead, they help define the conditions under which the case holds: diversified (for most people), globally aware, sensibly valued and matched to a horizon you can honestly commit to. But there’s one last thing that must be said and that most people either never hear, or ignore when they’re told:

Leverage combined with volatility often leads to ruin. Borrowed money removes your ability to wait, which is the entire source of the advantage of time because margin calls tend to arrive precisely when you most need to hold. Internalize this.

A Word About Optimism

It’s true that markets tend to rise over long periods and they continued to do so across a century that offered every conceivable reason to sell. That ascent has never been smooth thanks to double-digit declines that are the standard annual experience rather than an anomaly. The gap between market returns and investor returns is overwhelmingly behavioral, driven by exits made under stress and re-entries made too late, thereby missing the handful of days that tended to define a number of positive outcomes. The great practitioners describe their edge as patience rather than insight, and the mathematics of taxes, decision frequency, and uninterrupted compounding explain why. Separating substance from noise is the discipline that makes patience possible, and the real risks that include single-company failure, national stagnation, valuation extremes, short horizons and leverage are best answered by sensible and/or well-researched allocation and honesty about your own timeline, not by trading more.

In the end, the reason for optimism is what produced the chart I referenced throughout the piece. It’s the problem-solving mechanism that we, as humans, have been blessed with from Day 1. We have discovered how to make more with less, moved capital from dying uses to living ones, produced technologies that have furthered the mission of their predecessors to create a better and more able future. Every generation of investors has believed its crisis was the one that would end this powerful upward trend.

Every generation has been wrong.

Yes, the crises were real, but the engine of people solving problems kept running before, during and after them. That process shows no sign of stopping because it’s inherently human. My message to you is that it is not the investor's job to predict when and if this process will stop. Instead, it is to own a piece of it and then lean into the rarest quality in finance: the ability to leave it alone.

Disclaimer: The content contained herein is provided for general informational and educational purposes and does not constitute investment advice or a recommendation, offer, or solicitation to buy or sell any securities. The content reflects the writer's views and analysis as of the time of writing and is provided for context only. It does not address every factor relevant to any particular investor's circumstances, and investors should evaluate their own facts and circumstances before making any investment decision. The writer and/or affiliated funds may hold positions in the securities discussed and may buy or sell such positions at any time without notice. Past performance is not indicative of future results.