Is Long Term Investing Dead?

Is Long Term Investing Dead?

I am amazed how often I hear:

• "this is a trader's market"
• "buy and hold is dead"
• "the only thing that matters about a stock is what the price is doing"

The other amazing phenomena is the proliferation of ETFs. There is one for everything and they are becoming a large driver of the market.

Does all of this mean the long term investing (meaning more than a nano second) and individual stock picking are dead?

To me, it is exactly the opposite. If everyone is trading ETFs, then the fundamentals of the individual securities (the alpha) is largely being ignored. That can happen short term, but over time, the better stocks have to rise to the top. And my thesis is that is where long term investing still has a bright future.

Trading Sardines

Seth Klarman has a great story in Margin of Safety, where people became irrational about Sardines and starting bidding up the price of them. It was truely the "greater fool theory" as people bought the sardines not because they wanted to eat them, but merely to profit from them by finding someone else to sell them to at a higher prices. One man bought some sardines at a high price and ate them and then complained that they actually didn't tase very good. He was admonished as he clearly didn't understand that these were "trading sardines", not "eating sardines".

People view stocks and securities the same way. All that matters is the momentum of the price and do they think they can sell the security to some one else at a higher price. They forget there are underlying companies with underlying fundamentals and when you buy a stock you are (in fact) actually buying a part of that company.

My Kids College Funds

To those who say long term investing is dead, I point to exhibit A: the college funds of my children. I think very hard about what to invest them in and I have a long term investing horizon. Guess what? Their college funds are always my best investments. I do not buy and forget, but I try to put them every year in two or three stocks of quality companies at cheap prices. And it has worked very well (especially for them) every year.

2009: +104.7%
2010: + 43.6%
2011: +15.1%
2012: +15.1%

Obviously, I need to incorporate some of this long term thinking in my portfolios - which I promise I trade much more frequently with much worse results (if anyone is interested, I invested 2012 at the start of the year in two stocks: GNW and LNC).

USB to Increase Dividend?

One of my largest (and most successful) holdings in my dividend portfolio has been USB (up 34% versus Russell 3000 +12%). They announced their earnings yesterday (US Bancorp Earnings: Profits Grow by Double Digits For Fifth Straight Quarter) and they were generally positive. And of course the music to my ears was the talk of a dividend increase (they currently yield 1.7%). If you go back in time (pre-crisis), they used to be a $30 stock (about where they're at today) and paid $1.60 per year. I am not saying they would go that far, but that would be more than a tripling of what they currently pay (50 cents a year).

MFI Continues to Rock in 2012

There was a little girl who had a little curl
Right in the middle of her forehead;
When she was good, she was very, very good,
And when she was bad she was horrid.

I think that Mother Goose rhyme pretty much describes MFI investing. And right now it has been very, very good. On the year it is up a snappy 7.45%, beating the broader market by about 3 points.