When ‘Loss Aversion’ Meets ‘Time Horizons’ in Equity Investing

Marcellus Investment Managers' January 2023 newsletter applies Nobel laureate Daniel Kahneman's loss aversion theory to equity investing, arguing that the ratio of negative to positive emotion from equal losses and gains ranges from 1.5 to 2.5. Using a backtested portfolio that compounded at 21.74% CAGR over 20 years and outperformed its benchmark by 8 percentage points, Marcellus demonstrates that investors checking returns over 3-month windows experience predominantly negative psychological outcomes — their constructed 'Happiness Index' never turns positive at that horizon. Extending the assessment window to 12 months improves the picture materially, with positive outcomes appearing more than 50% of the time, while 3- and 5-year horizons see instances of unhappiness nearly disappear. The firm applies the same framework to Berkshire Hathaway's 60-year record and finds similar results. Marcellus attributes the short-term dissonance to temporary divergence between share prices and underlying business fundamentals, which it argues resolves over longer periods. The firm states its portfolio managers have maintained focus on long-term fundamental attributes — competitive moat and compounding potential — rather than short-term macro or market noise, and holds an intended average stock holding period of 8–10 years across a concentrated 13–15 stock portfolio.