Exploiting Myopia: The Returns to Long-Term Investing

For decades, long-term investing has been treated as a vague virtue rather than a distinct source of returns. Markets are often assumed to be efficient across horizons, with prices reflecting fundamentals regardless of who holds the asset or for how long. Recent research challenges this assumption by showing that the investment horizon of shareholders itself shapes prices and future returns.

Exploiting Myopia: The Returns to Long-Term Investing

• Jain and Jiao
• Working paper, 2025
• A version of this paper can be found here
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Key Academic Insights

Investor myopia creates predictable mispricing
Professional investors face strong short-term performance pressure from benchmarks, redemptions, and career concerns. As a result, they systematically avoid stocks that may underperform in the near term, even when long-run fundamentals are strong. This short-termism creates underpricing that patient investors can exploit.

Ownership horizon matters at the firm level
The authors construct a firm-level measure of investor horizon based on how long active institutional investors actually hold a stock. Firms dominated by long-horizon owners earn significantly higher future returns than firms held primarily by short-horizon investors, even after controlling for standard risk factors.

The premium concentrates where short-term constraints bind most
The return advantage of long-horizon ownership is strongest among firms with high idiosyncratic volatility and recent underperformance. These are precisely the stocks that short-term investors are least willing to hold due to interim risk and career concerns.

The effect is driven by constraints, not superior skill
Regulatory changes that increased short-term monitoring intensified the horizon effect, while improvements in information availability did not. This pattern indicates that long-term investors earn excess returns not because they forecast better, but because they are willing to hold assets others are forced to avoid.

Practical Applications for Investment Advisors

Time horizon is a real investment constraint
Advisors should recognize that many investors, including institutions, are structurally unable to tolerate temporary underperformance. Strategies that require patience are not just psychologically difficult, they are institutionally inaccessible to much of the market.

Discomfort is a signal, not a flaw
Stocks avoided by short-term capital often look unattractive precisely because they carry interim volatility or recent losses. For long-term portfolios, this discomfort can signal opportunity rather than risk.

Complement traditional factors with horizon awareness
Value, profitability, and quality signals tend to be strongest where investor horizons are longest. Understanding who owns a stock, and how patient that ownership is, can improve the interpretation of traditional factor exposures.

Align portfolio construction with true investment horizon

Long-horizon strategies require governance structures that tolerate tracking error and temporary drawdowns. Without this alignment, even theoretically sound strategies are likely to be abandoned at the wrong time.

How to Explain This to Clients

“Many investors are forced to focus on the next quarter, not the next decade. That short-term pressure pushes prices away from long-run value. When you are willing and able to hold through temporary underperformance, you can earn returns that impatient investors leave behind”

The Most Important Chart from the Paper

Figure 2 shows that the Horizon measure rises and falls around major firm-specific events that change who owns the stock and how long they are willing to hold it. For Apple, Horizon increased as the company matured and became a benchmark stock, while declining during leadership turmoil and market crashes. For Goodyear, activist battles, restructurings, and crises triggered sharp drops in Horizon, showing that the measure responds to real shifts in investor behavior rather than noise.

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

Abstract

Investment managers often face short-term incentives, such as redemption pressure following recent weak performance, that discourage them from holding positions through temporary underperformance. These constraints can lead to systematic underinvestment in firms that require longer holding periods to realize value. We examine whether these horizon-driven frictions generate predictable return patterns across firms. We measure long-term ownership at the firm level using active managers’ share-weighted holding periods (Horizon), and document that firms with longer Horizon generate significantly higher returns than those with shorter Horizon, particularly among stocks that are harder for myopic managers to hold. We exploit the 2004 SEC rule that increased mutual fund disclosure frequency to link our findings to myopia. We find that Treated firms experienced declines in Horizon and a stronger Horizon-return relation, consistent with increased myopia reducing long-termism and increasing mispricing. In contrast, we find no change in the Horizon-return relation following the XBRL mandate, which improved access to fundamental information but did not affect investor constraints. These results suggest that frictions in institutional holding horizons, not information-processing advantages, drive the observed returns to long-term investing.