Posts tagged ‘GMO’

Snoozing Your Way to Investment Prosperity

When it comes to investing, do you trade like Jim Cramer on Red Bull – grinding your teeth to every tick or news headline? With the advent of the internet, an unrelenting, real-time avalanche of news items spreads like a furious plague – just ask Anthony Weiner.    As fear and greed incessantly permeate the web, and day-trading systems and software are increasingly peddled as profit elixirs, investors are getting itchier and itchier trading fingers. Just consider that investment holding periods have plummeted from approximately 10 years around the time of World War II to 8 months today (see GMO chart below). Certainly, the reduction in trading costs along with the ever-proliferating trend of technology advancements (see Buggy Whip Déjà Vu) is a contributor to the price of trading, but the ADHD-effect of information overload cannot be underestimated (see The Age of Information Overload).

Source: GMO (James Montier)

But fear not, there is a prescription for those addicted, nail-biting day-traders who endlessly pound away on their keyboards with bloody hangnails. The remedy is a healthy dosage of long-term growth investing in quality companies and sustainably expanding trends. I know this is blasphemy in the era of “de-risking” (see It’s All Greek to Me), short-term “risk controls” (i.e. panicking at bottoms and chasing performance), and “benchmark hugging,” but I believe T. Rowe Price had it right:

“The growth stock theory of investing requires patience, but is less stressful than trading, generally has less risk, and reduces brokerage commissions and income taxes.”

This assessment makes intuitive sense to me, but how can one invest for the long-term when there are structural deficits, inflation, decelerating GDP growth, international nuclear catastrophes, escalated gasoline prices, and Greek debt concerns? There are always concerns, and if there none, then you should in fact be concerned (e.g., when investors piled into equities during the “New Economy” right before the bubble burst in 2000). In order to gain perspective, consider what happened at other points in history when our country was involved in war; came out of recession; faced high employment; experienced Middle East supply fears; battled banking problems; handled political scandals; and dealt with rising inflation trends. One comparably bleak period was the 1974 bear market.

Let’s take a look at how that bear market compared to the current environment:

Then (1974)                                                    Now (2011)

End of Vietnam War                        End of Iraq War (battles in Afghanistan and Libya)
Exiting recession                              Exiting recession
9% Unemployment                          9% Unemployment
Arab Oil Embargo                            Arab Spring and Israeli-Palestinian tensions
Watergate political scandal            Anthony Weiner political scandal
Franklin National Bank failure       Banking system bailout
Rising inflation trends                     Rising inflation trends

We can debate the comparability of events and degree of pessimism, but suffice it to say the outlook was not very rosy 37 years ago, nor is it today. History never repeats itself, but it does tend to rhyme. Although attitudes were dour four decades ago, the Dow Jones exploded from 627 in late 1974 to 12,004 today. I’m not calling for another near 20-fold increase in prices over the next 37 years, but a small fraction of that improvement would put a smile on equity investors’ faces. Jim Fullerton, the former chairman of the Capital Group of the American Funds understood pundits’ skepticism during times of opportunity when he wrote the following in November 1974:

“Today there are thoughtful, experienced, respected economists, bankers, investors and businessmen who can give you well-reasoned, logical, documented arguments why this bear market is different; why this time the economic problems are different; why this time things are going to get worse — and hence, why this is not a good time to invest in common stocks, even though they may appear low.”

Rather than getting glued to the TV horror story headline du jour, perhaps investors should take some of the sage advice provided by investment Hall of Famer, Peter Lynch (Lynch averaged a +29% annual return from 1977-1990 while at Fidelity Investments). Rather than try to time the market, he told investors to “assume the market is going nowhere and invest accordingly.” And Lynch offered these additional words of wisdom to the many anxious investors who fret about macroeconomics and timing corrections:

•    “It’s lovely to know when there’s recession. I don’t remember anybody predicting 1982 we’re going to have 14 percent inflation, 12 percent unemployment, a 20 percent prime rate, you know, the worst recession since the Depression. I don’t remember any of that being predicted. It just happened. It was there. It was ugly. And I don’t remember anybody telling me about it. So I don’t worry about any of that stuff. I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”
•    “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
•    “Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”

Real money is not made by following the crowd. Real money is made by buying quality companies and securities at attractive prices. The prescription to generating above-average profits is finding those quality market leaders (or sustainable trends) that can compound earnings growth for multiple years, not chasing every up-tick and panicking out of every down-tick. Following these doctor’s orders will lead to a strong assured mind and a healthy financial portfolio – key factors allowing you to peacefully snooze to investment prosperity.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Performance data from Morningstar.com. Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in TROW, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

June 18, 2011 at 6:29 pm 1 comment

Short-Termism and the Destruction of Wealth

Oscar Wilde, famous Irish playwright, is known for saying “People know the price of everything and the value of nothing.” In a new book titled the Value of Nothing, Raj Patel questions the efficacy of pure capitalism and builds on that idea that many of society’s major economic problems relate to the lack of focus on value. For example, the cost of a $2 greasy burger or $1 candy bar is actually much higher once you factor in the health costs associated with obesity and diabetes – not to mention indirect charges like trash management or environmental costs.

Patel focuses a decent amount on the social damage caused by the consumerism culture for cheap goods. I think this is certainly relevant when you consider our energy policies. Whether you are a “greenie” or not is almost irrelevant from a strategic or security standpoint. Since we import more than 2/3 of our oil  from abroad – much of it from countries that wish to do us harm – it seems almost like a no-brainer to have government create incentives to wean us off our addiction to oil (see Thomas Friedman article). Since pure independence will take decades to achieve, I firmly believe we must simultaneously expand our pool of domestic available fossil fuel resources without getting into holy wars over the environment. If there is a shared focus for energy independence and lower-cost, long-term solutions, then surely there can be space for some common ground.

Short-Termism in the Investment World

In the world of investing, instant gratification, short-termism and the “Cramer-ization” of America have served as fuel behind the housing and credit induced binges that have dragged down our economy. I think Jack Gray of Grantham, Mayo, Van Otterloo nailed it when he said, “Excessive short-termism results in permanent destruction of wealth, or at least permanent transfer of wealth.”  Decisions made based on the short-term concerns regarding today’s price may have longer lasting impacts, if the consequences of short-termism are not balanced with the probable outcomes discounted into future values. Short-termism merely creates useless churning and transaction costs that make Wall Street intermediaries a fortune, at the cost of investors.

Gray has a great chart from John Bogle data at Vanguard providing a historical perspective on portfolio turnover percentage basis (the inverse being the average investment holding period in years for fund managers):

As you can see from the data chart, the average holding period for equity mutual funds has gone from about 5 years (20% turnover) in the mid 1960s to significantly less than 1 year (> 100% turnover) in recent years. Advancements in technology have lowered the damaging costs of transacting, but the increased frequency, coupled with other costs (impact, spread, emotional, etc.), have been shown to be detrimental over time (Bogle).

Congress would do taxpayers a favor too if they focused on the long-term, rather than piling on debt and building deficits for future generations. If Raj Patel and Jack Gray can get our leaders and investors to strategically think about long-term value, then I know I can sleep more comfortably at night.

Listen to NPR Raj Patel Radio Interview

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds (including Vanguard Funds), but at time of publishing had no direct position in any company mentioned in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

January 13, 2010 at 12:01 am Leave a comment


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