While it certainly is possible to make money from short-term investing, it may not be the optimal strategy for investors to take.
There are a couple of reasons for this, which we will discuss below.
Reason 1: Market timing is impossible
As we have seen a lot in recent years, the share market is incredibly unpredictable. This means that short-term investors are particularly susceptible to market fluctuations, which can lead to significant losses if the timing is not optimal.
A good example is the chaos that ensued during the height of COVID-19. If you bought in around that time and saw your short-term investments lose 20% to 30% of their value, you may have had to lock in those losses.
However, investors that were able to hold on for the long-term are likely to have not only recouped their losses, but seen their shares now roar higher. They may also have received a few nice dividend payments during this time.
In respect to this, a recent note from Montake Global Investments highlights the following:
The share price of Foot Locker, an athletic apparel company in the US, halved during the COVID pandemic as reported profits fell by more than half in 2020. Then in the following year profits almost tripled and the stock price rose more than three-fold from trough to peak when the economy rebounded.
Reason 2: Potential for outsized returns
Another reason that short-term investing might not be the best way forward is the difference between potential returns thanks to compounding.
And this isn't if you can only identify small companies on the rise. Montake Global Investments points out that even holding onto shares in a company the size of Microsoft Corp (NASDAQ: MSFT) could be very rewarding over the coming years. It explains:
If Microsoft's trading multiple held its ground, earnings grew in line with our projections, and excess cash flows were paid out to shareholders in dividends, then Microsoft stock could be a 'four-bagger' over the 7-year horizon.
A less mature company, such as Spotify Technology (NYSE: SPOT), could generate even greater returns. The investment company points out:
In fact, the potential for upside can be even greater when burgeoning companies go on to achieve 'outlier' levels of success over extended periods. Spotify, the world's most popular streaming service, could end up being a 'ten-bagger' over the next decade as its base expands past one billion listeners worldwide, more services are offered, advertising takes off, and profitability inflects from break-even today.
Unless you're exceptionally lucky, this is unlikely to be able to be replicated from short-term investing according to Montake. It adds:
Unfortunately, the possibility of making multi-bagger gains is considerably diminished by investing over much shorter horizons, because earnings growth does not have time to change exponentially and changes in valuation multiples do not usually expand so quickly, if at all.
