In the financial markets, any investment decision is made in an uncertain environment, often swayed by rumours, irrational movements and a flock mentality which can make investors look more like a herd of sheep than the informed decision makers they would consider themselves to be. 
In a world where short-termism is encouraged by the power of algorithms and fuelled by the excitement found in fast-moving change, short-term performance can become an obsession and the long term neglected.
According to the NYSE Factbook, the average holding period of a share was eight years in 1960, five years in 1970, less than three years in 1980, 14 months in 2000 and just six months in 2010. Implementing a successful long-term investment approach means developing the ability to tune out from market noise and the desire for short-term gains, in order to focus on what matters.
Identifying companies which can defy the gravity of financial theory by displaying a strong aptitude to increase their earnings over the long term in a visible and regular manner means investing in stocks which are more likely to stand the test of time over the long term.
These high-quality companies know how to nurture competitive edge and high profitability relative to their competitors, and by so doing their share price benefits from the powerful force of compounding. Identifying them at a sufficiently early stage to accompany them through their development means taking full advantage of the force generated by their steady earnings growth.
Uncovering the power of a resilient franchise, or lasting competitive edge, is key to this approach.
In order to do this, knowledge and long-term conviction need to be built through in-depth, on-the-ground research. The kind of research which allowed Comgest founder, Wedig von Gaudecker, to identify a future software leader, SAP, back at the beginning of the 1990s when the company was not well known outside Germany.
At a presentation of results at its head office in Walldorf, it seemed the analysts were only concerned with filling in their earnings forecasts for the coming quarters. None of these analysts availed of the opportunity to engage with the chairman Dietmar Hopp at the speakers’ desk. It appeared that nobody wanted to know more about SAP’s flagship product, of which he was one of the architects.
Later, at the canteen, the analysts rushed to speak to the chief financial officer. Hopp, on the other hand, sat alone in a corner. It was a lucky opportunity for Wedig to be able to listen to him face-to-face and get a better understanding of the programme that would break IBM’s domination. Comgest thus uncovered a great investment opportunity for its Europe funds – and an extremely interesting story for its clients.
Developing the expertise to recognise similar opportunities requires continued monitoring of companies, something which can be facilitated by building durable relationships with their management. In this way, you are better placed to analyse their long-term trajectories and the many twists and turns they may take along the way. This long view based on field research is a major advantage to delivering long-term performance.
Investing with a long-term approach also requires patience and benefits hugely from a responsible mindset. When investing in a company for the long term, it is essential to analyse the entire spectrum of a company’s risks, particularly the cultural and human dimension.
Culture is incredibly important for a company as it is one of the most stable aspects over time and can lead you right back to a company’s origins. Straumann, for instance, could not have risen to its present worldwide dominance in dental implants without the skills acquired from its history in the Swiss watch industry. The cooperative origins of Essilor Luxottica means that employee share ownership has constantly been the major strength on which the company has drawn to rise to the rank of world leader in its category. This remains a key factor in the merger with Luxottica.
For a patient investor, stock market performance follows in line with a company’s business performance. However, investors obsessed with the search for short-term performance often do not allow themselves the luxury of waiting for a share price to rise over the long term.
This creates investment opportunities for long-term investing. It is during difficult market periods that the real fundamental quality of companies selected for the long term can be seen best. The less cyclical or even non-cyclical nature of these companies enables their businesses to better withstand economic ups and downs.
Downward market corrections provide opportunities to accumulate top-quality stock. These companies can initially be caught up in irrational, short-term bear runs, but gradually, when the wheat is separated from the chaff, discounted quality growth companies become a target for investors.
Arnaud Cosserat is chief executive of Comgest. The views expressed above are his own and should not be taken as investment advice.