The Difference Between Short-Term and Long-Term Investors

Joachim Klement is an investment strategist based in London whose steady stream of investment-related blog posts and publications has attracted considerable attention. As the stock market has shown significant volatility following the launch of the second Trump administration, I decided to translate his piece explaining the differences between short-term and long-term investors, believing it would be useful for investors.

Any experienced investor knows that the mindset of short-term investors is very different from that of long-term investors. Short-term investors focus more on technical factors in the market, while long-term investors pay more attention to corporate fundamentals. However, the greater this gap becomes, the higher market volatility can be.

Anthony Cookson and his co-authors analyzed individual investors’ stock predictions on Motley Fool’s CAPS platform. Individual investors behave differently from professionals, but I believe there are universal lessons we can learn from their analysis.

First, let’s look at the average investment sentiment of short-term investors (with an investment horizon of three weeks or three months) and long-term investors (with an investment horizon of at least one year. As you might expect, long-term investors are on average more optimistic, and their sentiment changes more slowly than that of short-term investors.

This holds true even during periods of severe market turmoil. During the COVID-19 pandemic in 2020 and the financial crisis (gray bars), long-term investors remained calm and their sentiment barely moved. Short-term investors, by contrast, saw their sentiment plunge sharply. After Russia’s invasion of Ukraine in 2022, when inflation surged, sentiment declined for both long- and short-term investors, but the drop was much steeper for short-term investors.

At a more granular level, we can also observe differences between short-term and long-term investors around earnings announcements. The chart below shows how short- and long-term investors update their price targets in response to positive or negative earnings surprises. Again, short-term investors react much more aggressively and always move in the direction of the earnings surprise. They are exploiting earnings momentum. Long-term investors, on the other hand, hardly react to a single earnings release and focus much more on valuation and other long-term drivers.

These differences in how sentiment evolves help drive trading volume in the stocks concerned. The larger the sentiment gap between short-term and long-term investors, the higher the trading volume and the greater the potential price volatility.

In a sense, long-term investors tend to take the other side of trades made by short-term investors after earnings announcements or during periods of market stress such as financial crises or pandemics. And you don’t need to be a financial historian to figure out which group tends to perform better on average. Personally, I would not bet my money on highly active short-term investors.