One of the big schisms in investing is between people who are focused on the “short term” and those who invest for the “long term.”
Q1 hedge fund letters, conference, scoops etc
The problem is, you might think you’re one… but you’re actually the other.
The (real) long-term camp aims to follow the model of Warren Buffett or Herbert Wertheim (who is, according to Forbes magazine, the greatest investor you’ve never heard of)… and you find great companies, invest in them and don’t waver. (Wertheim, among other investment coups, invested in Apple (Nasdaq; ticker: AAPL) and Microsoft (Nasdaq; ticker: MSFT) at their IPOs.)
They own the stocks of individual companies. They know what they own. And they can buy or sell whenever they want.
The fake long term
If you own an investment fund of any sort, though, short term and long term may have a lot more in common than you’d think.
That’s partly because different people define short-term and long-term investing differently. Depending on who you are and what you’re doing, “short term” can be anything between the time it takes you to blink, to a lunar cycle, to a few years.
And “long term” can mean anywhere from a few days (an eternity for some traders), to a few years, to two generations from now.
Most fund managers – mutual funds, hedge funds, and most other funds that aren’t wedded to an index – talk about “investing for the long term.”
It’s probably one of the most abused expressions in investing. Most of all, you’ll hear it from asset managers who talk about how they “engage[d] extensively with companies, clients, regulators and others on the importance of taking a long-term approach to creating value.”
That’s how Larry Fink, the head of Blackrock, the world’s largest asset manager, says his company’s funds invest.
Of course, companies (or people… including private bankers and financial advisors) that manage your money want you to invest for the long term. The longer they control your money, the more you’ll pay them in fees. And it can take a while for their great investing ideas to work out. At least that’s what they want you to think.
What the “long term” often really is
A number of years ago, I managed a hedge fund. Like most people who manage other peoples’ money, I talked about investing for the long term. I didn’t have a magical short-term trading system (no one does). So it was a lot safer to talk about cycles, themes, trends, low valuations and long-term partnerships.
After all, like Blackrock, I wanted to be married to other peoples’ money – not just take it out for dinner and a movie. It’s better to make 2 percent (for a hedge fund) of someone’s money for 10 years than for just a few months.
But the reality was, my idea of long-term investing was really “as long as the idea works.” I wasn’t focused on where a stock I bought was going to be trading six months, one year, or three years later. I was concerned about where the price was going to be over the next week or month.
For me, “long term” was the end of the quarter, whether that was two months or two days away. And the dirty secret of most mutual funds and other big money managers (no matter what their marketing pitches say) is that they think the same way. Ignore the marketing hype. If you let someone else take care of your money, very rarely is there a real “long term.”
Two bad quarters away from the pink slip
Money management companies, and the people who manage money, are usually assessed based on their quarterly performance. They generally have to show their holdings once every three months. Some are paid based on how they performed (compared to the index or in absolute terms) over the quarter. So for people who manage money, the unemployment line is one or two bad quarters away.
That means a stock that doubles over the next two years, but does nothing for the first six months, is “dead money.” Few fund managers are willing to wait for a long-term idea to work out if that takes more than, say, three months. That means less money in the bank.
Fortunately, there is a way out of this: Invest for yourself and define your own long term. The reality is that a stock that doesn’t do anything for six months, but (say) doubles over two years is a fantastic investment… one that even great investors experience only occasionally.
It’s worth waiting
Waiting – a la Herb Wertheim – can be worth it. For example, lots of studies have shown that buying stocks that are cheap – that is, have low valuations – will result in better performance than buying stocks that are expensive.
One study found that over a 25-year period, the cheapest 10 percent of stocks in the Russell 1000 Index, a big U.S. market index, performed four percentage points better per year than the index as a whole. That means investing in the cheapest stocks would have earned you 2.5 times as much over the period than investing in the broad market.
But few fund management companies, or fund managers, have the necessary kind of patience to buy cheap stocks and wait. They’re afraid of being caught in a value trap. They want to get paid, this quarter. And they don’t want to get fired.
But you can invest for the long term yourself. Maybe, like I did (and like most funds), you’ll sell at the first sign of trouble. But the best thing is that giving yourself time allows for good things to happen.
Good investing,
Kim Iskyan
Publisher, Stansberry Pacific Research
