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Concentrate on Long-Term Investing, Avoid the Urge to Trade

Posted December 14, 2009

Topics: Finance & Investing

At year end there are tax related investment decisions to consider, and this year there are unusual economic and financial issues that could have a bearing on your investment outlook. These factors tend to encourage investment transactions and may be a catalyst to pull the trigger on investment positions. Certain moves may be warranted as the year end approaches (see earlier blogs), but my advice is to keep such shifts to a minimum and always emphasize the long-term nature of investing. In Full of Bull, one of my primary investment strategies is to hold stocks long-term. And I referenced this in my November 16th blog on Warren Buffett’s railroad acquisition.

Wall Street is caught up in a short-term tyranny. So are CNBC and most other media sources. They constantly promote quick-paced, in-and-out trading. This generates transactions and commissions for brokers and guarantees an ongoing audience for the media. Jim Cramer, the star of Mad Money, is the ultimate example of the media-induced trading frenzy. He shouts out several new ideas on a daily basis. The only problem is that his “recommendations underperform the market by most measures,” as analyzed by Barron’s. Street research recommendations are almost never aimed at more than a one-year time frame, and for the most part have a few months' horizon or even shorter. The average length of time New York Stock Exchange stocks are held is around six months compared to a 12-month average back in 1999, and that was at the height of the day-trading era! This is because the insider professionals and institutional investors are trading driven, and it seems on a mediocre performance treadmill.

Short-term trading is highly challenging, even for veterans on brokerage trading floors who are in instant contact on all rumors, opinion shifts, news, and other influences that have an immediate impact on stock prices. If you think you are smart enough to achieve consistent gains by furious buying and selling, you are probably also telling your friends you always win at the tables in Vegas. You need to avoid getting caught up in the sizzle or gambling aspect of trading. It is a losing game. You can outperform the Street by steering clear of that madness. That is their game. Play your game.

A study by professors at UCLA and the Helsinki School of Economics finds a curious correlation between the kind of people who drive fast and those who trade frequently. Both behaviors are dangerous. They suggest a tendency toward thrill-seeking. Long-term investing is just too boring for these people. But the results of the study indicate that trading did not produce superior results, especially given the attendant transaction costs. Do not seek excitement or entertainment from trading. Be serious and invest.

During most of my 32-year career on Wall Street, I made client marketing treks to Europe on a regular 18-month basis. On these trips to meet with institutions, I observed an attitude that can be valuable to you as an individual investor. European institutional investors allocate a portion of their portfolios to U.S. stocks, and they bring a refreshingly more rational long-term investment philosophy compared with the U.S. trading mentality. European investors are not as absorbed by quarterly portfolio performance. The distance, the time difference (NYSE trading begins at 2:30 p.m. in Paris) less contact with U.S. company executives and analysts, and a tendency to be more patient than Americans may also be reasons. Europeans tend to invest in U.S. stocks over the long-term. U.S. investors should take a hint from Europe.

It’s the Holidays, Give Stock to Your Kids

This is the gift giving time of year and if you have children consider giving them stock. The lessons to be learned by children in owning stocks are priceless. When my kids were growing up and their stocks achieved some gains, they immediately became capitalists. It will not take your offspring long before they start asking questions about which stocks to own, the reality of gains and losses, dividends, investing, business, and capital accumulation or savings. Youngsters can glean financial training for life when they actually feel the gravity of owning stocks.

I let my kids help choose the theme and even make mistakes in picking stocks. My son loved model trains and real railroads, so I bought him a few shares of Union Pacific. I gave them my alternatives or suggestions but allowed a wide berth for them to make the call. I once talked to my daughter’s fifth-grade class about stocks and gave them the annual reports of The Gap and The Limited. My kids are long since out of college, but we still do this investing thing. My daughter is a zingy, liberal, creative type as a baker and assistant pastry chef, but she still loves capital gains. My son, an aerospace engineer, has turned out to be quite the investor, doing his own research, asking questions, listening to conference calls, pondering investment themes, etc…just what I had dreamed of when I first gave him a few railroad shares.