Over the last seven days, Rolls-Royce Holdings (LSE:RR.) shares have soared in value by 35%. I could have turned £5,000 into £6,750 by buyibg last week! But, as tempting as it might be to try and find similar opportunities, I believe that successful investing is all about taking a long-term view.
Last Thursday, Rolls-Royce published its 2022 results. Compared to the year before, underlying revenue, operating profit and profit before tax were all higher. And investors loved what they saw. The share price closed 23% higher.
The next day, International Consolidated Airlines Group (IAG) announced its results for the same period. The parent company of British Airways reported similarly good news, having turned a loss of €2.9bn in 2021, into a profit of €0.4bn in 2022. Yet its share price finished the day 7% lower.
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Rolls-Royce earns revenue from the aircraft engines that IAG uses. This means their financial performance closely mirrors that of one another. But on results day, their share prices moved in opposite directions.
Looking ahead
Only by taking a long term view is it possible to avoid the inconsistencies of the market, like those described above.
Share prices are determined by the interaction of thousands of buyers and sellers. I’ve no idea what these individuals and institutions are thinking, nor their motivations for placing the trades that they undertake. So, what’s the point of trying to beat the market on a daily (or hourly) basis?
If I didn’t focus on the long term, I’d be trading rather than investing.
Not only is trading riskier, but it can also be hard work. I’d have to be constantly monitoring price movements, placing numerous buy and sell orders each day. I could probably make a profit on a few deals. But I could also lose heavily.
De-risking
To make my life simpler, I could invest in a tracker fund. This would remove the need for me to identify individual stocks for my portfolio, and enable me to achieve diversification through a single investment.
The FTSE All-World index comprises stocks with a combined market cap of $60trn. A fund that tracks this index is spreading risk across 4,000 companies located in 49 countries. Equity investing can’t get much more diversified than this.
Between 1994 and 2021, the average annual increase in this index was 9.9%. Although, there have been some bumps along the way. But these downturns prove the benefits of investing for the long term. For example, if I’d invested £5,000 at the end of 2007, my initial investment would have shrunk to £2,900 by the end of 2008.
However, if I’d first invested in 1986, the same stake would now be worth over £20,500.
A final thought
Just take a look at Warren Buffett. He’s probably the most successful investor of all time, and once said that his “favourite holding period is forever“.
Buffett is worth more than $100bn today — nearly eight times the current value of Rolls-Royce. Most of his wealth came from his shareholding in Berkshire Hathaway. Between 1965 and 2022, shares in this company grew in value by 3,787,464%!
Following his lead long-term thinking, if I wanted to buy shares in Rolls-Royce, I’d be looking to hold them for at least seven years, rather than seven days!
