Long Term Investors Are Too Short Term: The Key Question is How Long is the Race?
As the readers of my posts already know, I learned critical elements of security analysis and portfolio management by handicapping thoroughbred horses at the New York racetracks. When deciding on which races to wager on instead of just observing, the key decision was to guess how fast the race was going to be run. Further, some guesses were helpful in terms of the segments of the race. Through this analysis I could determine which horses were likely to be in the lead at important times and whether horses that normally run from behind the crowd had enough time to catch up and be leaders at the end.
Do you notice that almost all discussions of supposedly long-term investors are focused on the present or the very immediate future? Can you remember an instance when we have seen the best performing stock in early January be the best for the year, or much more importantly the best stock for ten or more years?
Investing for grandchildren can help the picks of the grandparents
At a recent investment group of semi-retired and fully retired portfolio managers, chief investment officers, and senior fundamental and technical analysts, almost all of the talk was about how these remarkably experienced and smart investors focused on their own accounts as they dwelt on how they saw the current investment picture. The general conclusion was sobering and led many of the individuals to only a few possible purchase decisions, without much in the way of changes made to their existing personal portfolios.
In an attempt to bring greater value to the discussion, I asked that we focus on investing for our grandchildren. In that line of thinking, I asked the group to show by a raised hand if they thought that in some period, at least ten or twenty years in the future, we would see US Treasury interest rates above ten percent. The vast majority of hands went up. I suggest that this view is more important in setting policy than whether the esteemed Dan Fuss of Loomis Sayles is right in his intermediate projection for ten year US Treasuries at 4.25%. The key point is that this “horse race,” which is indefinite in length, is likely to be run differently than our memories of past performance.
Change of data has unrecognized impacts
Those who follow the races should take into consideration a change of equipment on the horse. The following changes are probably under appreciated:
- US Treasuries are already trading on the basis that they are “AA” relative to German Bunds
- Observable prices are going up: real estate at the high end in addition many food items and costs of services. (We don’t fully appreciate the impact of the decline in energy prices.)
- The measures quoted by the various government agencies on inflation do not capture the hollowing out of middle class employment conditions. While there are a large number of highly skilled job openings, the costs of general employment are structurally rising and those positions that can not be replaced by machines are being supplanted by lower cost domestic and foreign contractors.
Society and investment policies do not reflect the changes and the long-term outlook.
Please share with me how your long term outlook is evolving.
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I think we need to consider the form of Investor that is investing long-term, and then consider the form of investment that is appropriate for each form of investor.
For us as individuals, investing through stocks is a good choice. Focusing on the long term is also a good discipline.
For us as participants in a professionally managed pension fund, the fund is not like us. It has scale we do not have. It has longevity we do not have. It has purpose that we do not have. It has power that we do not have.
For pensions, going direct is the better investment form, participating directly in wealth creation, as it is created. As individuals, we benefit from this indirectly, in the form of income security in our retirement.
For pensions, it’s not about either short term, or long term. It’s about constant prosperity in a perpetual present, both now and later.