How much does time matter in financial markets?

In financial markets, the decisions made by investors largely depend on their expectations about the future. Expectations are largely made based on the historical performances of themselves as well as their investing targets. They compare the historical performances of their models with the actual targets' historical performances in order to improve the effectiveness of their models, then they use their amended models to make their expectations. Every investor in financial markets is doing the same, the only difference is the differences between their models. Some people argue that people do not only look back to the history, they also try to foresee changes in the future, for example, the coming central bank monetary policies and governments' fiscal policies. However, do people really make forecasts without looking back from the history? The answer is definitely no. Many peoples' forecasts are made by their individual experience, and their experience is made of the history they have experienced.

We have to admit that without considering black swan events, when the future is further ahead, it is harder to predict, this is because more changes will be made when the future is further ahead of us. Usually in order to compensate higher risk, we expect higher returns, this is why the rates for long term investment are generally higher than the rates for short term. However, if we consider the discount rate, it means the value in the future is lower than the value at the moment. If the discount rate is much greater than the risk-free return rate, it is almost meaningless to expect returns from a long term project, as for a company, the decisions are usually made based on at most a 5 year period, even for the majority of governments, this is true as well; therefore, the returns from a project which lasts over 5 years are more dependent of the exogenous factors rather than the endogenous factors. There are much more uncertainties about exogenous factors than uncertainties around endogenous factors, as countless factors are able to influence the environment and different participants can have different degrees of influence on the environment, which makes it impossible to estimate an appropriate outcome of the environment (the market or the economy) in a long time.

Therefore, I think being “short-sighted” is probably a good choice when participating in the financial market, as almost all of our possible expectations and decisions are made on our historical experience and observations, when the future is further ahead, our expectations and decisions become more likely to be wrong. Give an example, the housing crisis in US in 2007 was a result of Clinton’s housing plan which aimed to provide housing for more people in America. Even if you could see a crisis would come in 2007, you could not short the housing market immediately, the most profitable way would be shorting in early 2007, and such profiting method is not about making good expectations about some events in the future, it is about having critical observation of the market and making the right move ahead of others.