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Short-term Thinking Is Back on the Market

February 22, 2012 | About:
Ale Schuvaks

Ale Schuvaks

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Today on Wall Street there is a trend to follow: the get-rich-quick investment scheme. In the 1960s, there was the idea of obtaining wealth through a new magic formula, synergy. It meant combining companies to enable management to make more profits as these two combined companies would work together increasing revenue and cutting costs. This derived in the craze to create conglomerates – large companies made up of several small ones. Synergy meant that 2 and 2 together could equal 5.

It worked for a while, at least in terms of the stock price, and at least until it became apparent to investors that the result would not be equal to 5 and be close to 3. And as with most fashions it disappears and comes back periodically.

Just like synergy, there are others such as the high-turnover performance game, market timing, and momentum investing. The latter—the notion of buying stocks simply because they were going up—contributed to the Internet stock craze. The summary of this was the “day trader”, considered a new profession that developed in the late 1990s and for many long term players, the opposite to investment.

All these schemes have something in common: an obsession with short-term results. This means setting aside fundamental business values and causing major losses to speculators. Both sophisticated and individual investors have proved to be susceptible to these schemes. Both are prone to short-term thinking. For example many pension funds hire professional money managers and measure they performance every three months. This leads to short-term “hire and fire” decisions and encourages managers to look for what is hot and set aside sound investment principles. Actually, the IPO phenomenon was a result of institutional excess as well as of mistakes of individual investors.

Many investors, including pension funds, insurance companies and other institutional investors no longer carry out an in-depth analysis about the company they are willing to buy. They follow alternative strategies that are widely used but unfortunately they all have a very bad defect in common: they reject making company judgments about price or value or the need to analyze time horizons or other factors that are essential to value investing or long-term investing.

Today, with the speed in communication and the desire to get rich quickly there is a desire for short-term events and results. Furthermore, the ability to wait and anticipate have decreased. There is more speculation, more danger and more risk. There is a permanent release of information from financial news, Internet web sites, radio, newspapers, and magazines. In one breath, investors are advised to keep the course and to hang on for the long haul. In the next breath, they are given a road map to short term riches and reasonable-sounding guides to switch paths and chase the latest fad.

There is a study carried out by Dalbar, Inc.’s “Quantitative Analysis of Investor Behavior” (QAIB), which started in 1994 and show s how mutual fund investors do not have a long-term perspective, which adversely affects their results.

In 2000, investors maintained their investments for only 2.6 years and the lack of adherence to a buy-and-hold strategy affected returns. The average fixed-income investor realized an annualized return of only 6.08 percent, compared to 11.83 percent for the long-term Government Bond Index.

If an investor wants to make money permanently, he must follow a long-term investment approach. This kind of approach is the one that promises rewards.


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