So Long, Short-Termers

I feel sad when I think of some of the people out there who may have just washed their hands of the whole concept of investing. I've heard a few media mentions of what is being called a "lost decade," and that does sound depressing. Then again, maybe those of us who stick it out should be glad if short-term thinkers and speculators get purged from the system.   

After all, the core of many of our current problems has been short-term thinking. 

Who cares about tomorrow? We want it all today!
Obviously, it was an error in short-term thinking to give mortgages to people who ultimately wouldn't be able to pay them, as it became commonplace to make mortgages affordable for so many only in the short term by offering no-money-down, interest-only, or adjustable-rate products so everyone could buy more house than they could really afford. It was also an error in short-term thinking for those people to take them.

Greed and euphoria -- two very myopic emotions -- kept driving prices higher and higher, making everyone feel richer and richer, believing it could never, ever end -- until kapow! End it did. And that's not even mentioning the newest financial bogey: derivatives in the form of credit-default swaps. There has been a ton of short-term thinking, all meant to line pockets in the near term with no thought that such parties don't last forever. 

Former Citigroup (NYSE: C  ) CEO Chuck Prince characterized the dance party well in mid-2007: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." A good part of this crisis can be blamed on the short horizons of executives at these institutions and on investors who awarded them lavish pay packages based on short-term performance.

And so we've got historic flameouts like AIG (NYSE: AIG  ) (which is now getting a bailout from its previous bailout), Fannie Mae (which just reported a $29 billion loss -- a massive $13 per share -- in just one quarter), Freddie Mac, and of course retail bank failures and hookups galore as stronger companies like Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Goldman Sachs (NYSE: GS  ) swallow up the losers.

Of all the things I've lost, I miss my mind the most
Unfortunately, the problem is more pervasive than subprime lending or even the housing bubble. Our entire culture has become swept up in this speculative, short-term mindset. The people who said, "The only way anybody can make big money is in Internet stocks! [that have no profitability and a wacky business model]" seemed quite happy to switch to "The only way anybody can make big money is in real estate!" As long as there was another speculative bubble, they were ready to jump on and hope to float away to riches.

As for that "lost decade" in investing, let's not forget the concept that maybe our economy was artificially buoyed by speculation and debt for all that time. That decade was simply a continuation of the speculative "new economy" mindset, which resulted in a dot-com crash that decimated the Internet industry, with the exception of strong companies like Amazon.com (Nasdaq: AMZN  ) and eBay (Nasdaq: EBAY  ) .

After the bubble burst, the Federal Reserve proceeded to lower interest rates to rock bottom to revitalize the economy, and of course that sparked a debt-fueled consumer spending frenzy and a speculative, out-of-control asset bubble even as real incomes stagnated.

The government then embarked on a policy of deficit spending (including war expenditures), and even when the recession was "over," it just kept right on spending. What's more, consumers were also encouraged to keep spending, even on debt. Digging a massive debt hole seems to have been couched as the patriotic, even American, thing to do.  

So, hmm, lost decade -- if there's anything that really got lost in the past decade or so, I'm pretty sure it was common sense. The speculative aspect to the illusion of wealth creation was simply unsustainable. Hopefully many, many lessons will be learned.  

Farewell to speculators
If speculative investors have to get out of the kitchen because they can't stand the heat, then so be it. They're just not built to look for great companies they can hold for five, 10 years, maybe forever. The folks who can't stomach bear markets are probably better off on the sidelines -- at least until they can learn patience and temperament. Remember Warren Buffett's words: "The most important quality for an investor is temperament, not intellect."

The quick-buck-now mentality in general has really done a number on our system; we need to ditch the Vegas stuff (unless we're in Vegas). The only way to really make money investing in the markets is to buy quality companies at good prices and hold on for the long term. It's time for all of us to remember how prudence, patience, and high-quality stocks are the path to real investing rewards. 

Don't go
Here at The Motley Fool, the buy-and-hold mentality is part of our DNA. In fact, when Fool co-founders David and Tom Gardner pick stocks for their Motley Fool Stock Advisor service, one of their favorite questions to ask when vetting possible stock ideas is whether the businesses are built for the next 100 years.

Even if we have had a "lost decade," Stock Advisor has outperformed the S&P 500 by 26 percentage points since its inception in 2002. We believe many of the businesses on our scorecard will stand the test of time -- if you'd like to see those recommendations, we offer a free 30-day guest pass. Simply click here for more information.

And good riddance to the short-timers. We're better off without them.

Alyce Lomax does not own shares of any of the companies mentioned. eBay and Amazon.com are Stock Advisor recommendations. Bank of America and JPMorgan Chase are Motley Fool Income Investor selections. The Fool has a disclosure policy.


Read/Post Comments (22) | Recommend This Article (56)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2008, at 2:56 PM, andrewzito wrote:

    "I feel sad when I think of some of the people out there who may have just washed their hands of the whole concept of investing. I've heard a few media mentions of what is being called a "lost decade," and that does sound depressing. Then again, maybe those of us who stick it out should be glad if short-term thinkers and speculators get purged from the system.

    After all, the core of many of our current problems has been short-term thinking."

    Sounds like you have crocodile tears as I doubt that you were very consistent on your aforementioned point.

  • Report this Comment On November 14, 2008, at 2:59 PM, andrewzito wrote:

    Perhaps you should prove that you firmly established such critical creditionals regarding caution while the market was roaring now that it is in a downward spiral. Prove you aren't all mouth and while even if you cloaked your past article with words or caution that it wasn't in actuality gushing for the bull!

  • Report this Comment On November 14, 2008, at 4:22 PM, kpmom wrote:

    I know the Motley Fool has always has pushed a long term view, but when people are opening their 401k quarterly statements and find their holdings down 35%, 50%, 75%, or more...when companies that made it through the Great Depression are going under...when our govm't decides we tax payers need to bail out, well, it seems like *everybody*, you might forgive us if the old buy and hold *forever* stuff doesn't sound all that appealing right now.

  • Report this Comment On November 14, 2008, at 4:56 PM, Dart65GTConv wrote:

    Recently, commented in caps about the evolution of my portfolio. Started investing on my own in May 2008, needless to say with my lack of knowledge in all things investing this market made a hit and run or duck or what ever it took to stay in front of the Street. Recently that just became impossible. After cashing out temporarily I started buying value and fundamentals on sale. Next after some time, do the math nearly 700.00 a month in dividends rack up. Prior I considered them useless and a waist of company funds. I also couldn't afford enough position to make them count. Now this is investing time and look forward to adding not trading so much. But I must admit the thrill of the hunt I enjoy and some trading for to fulfill that desire will continue. Born in the fire 5/08/08. One question What is this thing you all call a bull market?

  • Report this Comment On November 14, 2008, at 5:08 PM, Dart65GTConv wrote:

    No

  • Report this Comment On November 14, 2008, at 5:13 PM, Dart65GTConv wrote:

    What the difference between a 401k and a hostage. If guessed "Nothing" that would seem to be correct.

  • Report this Comment On November 14, 2008, at 5:16 PM, TheOthermfa wrote:

    Au contraire... I think it's so-long-long-termers. I know several daytraders and swing traders who love this market, but I don't know anyone who is/was a buy-and-hold kind of gal who is happy.

  • Report this Comment On November 14, 2008, at 6:14 PM, Dart65GTConv wrote:

    This is still and will maybe always now be a traders mkt, but a little softer income is ok for core holdings. Amazingly my own business is booming and shorter plays can sometimes be to risky. Trust me 500% in a few days here and there is not shameful or regretable. This is a market built on trading.

  • Report this Comment On November 14, 2008, at 6:58 PM, LadyA wrote:

    Back in July 2007,I had a fairly substantial amount in two well respected funds that had a good track record. .The market kept going up but had no rational to it.I converted my 401k and IRA accounts along with other investments in the same mutual fund and went to money market funds. My Daddy told me a long time back,if you don't now the players in the card game,fold your cards. When the market starts to make sense I may get back in. I am 82 years old and remember the depression. I may be wrong but the Dow can very well go below 7000 and I would not be overly surprised to go below 6500.

    I have another fear. We are printing money without backing,we have an outrageous amount owed to foreign nations that do no really like us. If we cannot borrow funds and keep up printing funny money and everything implodes and Washington cannot pay off the non producers,there could be anarchy and riots.

    In one way ,at my age ,my wife and I will survive without too much discomfort ,but I worry about our children,grand children and great grandchildren that have to face this future

    Andrew

  • Report this Comment On November 15, 2008, at 11:42 AM, cruiser9806 wrote:

    LadyA, it will all normalize over time. The problem with this drop/recession/depression/whatever is eveyone points to it as the "Great last depresion" The people in 1931 probably said the same thing. I went into treasuries when the S&P hit 1300 and came back in at 911 with 40%. Holding the other 50% to see where this all plays out. I can stand a 20-30% drop since i still have 15 years of work left. In your case you did the right thing. My only difference is 10% of my holdings is in Gold Mining stocks, just in case. As far as the borrowing, the whole world was on a binge so we are all in this mess togethor.

    Your children, grandchildren and great grandchildren will be allright. So will mine, if any of my older than 27 year old kids finally decide to give me a grandchild. :)

  • Report this Comment On November 15, 2008, at 11:45 AM, cruiser9806 wrote:

    I can't wait for a ban of all spreads leaving only Puts and Calls. Thats the real problem. You make money going up, you make money going down. With this scenario, long term is DOA.

  • Report this Comment On November 16, 2008, at 1:23 PM, trader000 wrote:

    ####

    On November 15, 2008, at 11:45 AM, cruiser9806 wrote:

    I can't wait for a ban of all spreads leaving only Puts and Calls. Thats the real problem. You make money going up, you make money going down. With this scenario, long term is DOA.

    ####

    You must be joking. Front month option premiums are at 60+ vols (4% daily move breakeven), making it extremely difficult to make money with delta-neutral long vol strategies, even with the recent big market moves.

  • Report this Comment On November 16, 2008, at 9:38 PM, ReillyDiefenbach wrote:

    Some of the best money you can make is the money you don't lose. I bailed last November, and have been happy to make my four percent while the buy and holders suffer the torments of the damned. Alyce, how much money have you lost in the last year? Just curious.

  • Report this Comment On November 17, 2008, at 11:25 AM, FinancialFellow wrote:

    I have to admit as much as it hurts to see my retirement accounts dropping 30-40% this year I do feel very good about the fact that it creates buying opportunities and that, as Alyce mentions, it gets the short termers out of the market. That said, I believe very much in self-accountability. These folks that don't continue to invest in the stock market will hurt themselves in the long run. That said, I'm going out on a limb here when I say that there will still be some form of social security to assist these folks in the future: http://financialfellow.com/2008/11/11/you-will-receive-socia...

  • Report this Comment On November 18, 2008, at 4:53 PM, syvranchr wrote:

    When the stock market started going South (and that IS only my opinion) I moved most of the cash over to "LEAN PIGS" and have actually been enjoying it because I have a broker in that area and I find it fascinating. The time of my move was around Fedbruary, I DID make some money as a "day trader" (a dirty term now, I guess). But it really was not near what others claimed.

    When I was in an ANNUITY with Chase my Advisor kept telling me and telling me things will always level out. I told him "no, no, no things go in cycles and if you know how to surf those cycles that money is better than the potential of just waiting around". I think in part since to "STAY THE COURSE" was the "COMPANY WAY", it was also a very lazy way. People just did NOT want to keep current with events that may have impact on them in the short term.. this is a fact of life. I felt somewhat vindicated when I read Bill O'neil's book. He stresses these types of cycles as well.

    And WHAT is "normalize" here? I challenge ANYONE to define that in the global einvironment we find ourselve in within just a very short period of time and the amount of government subsidies all of this will have to pay for, for future generations.

  • Report this Comment On November 21, 2008, at 5:35 AM, dannydanger wrote:

    At this time, I would have to question you guys credibility. Will these stocks ever get back to where they were? How could anyone say that now is the time to buy any stocks? There is simply no good economic news that justifies it.

  • Report this Comment On November 21, 2008, at 11:41 AM, AngelMay wrote:

    I'm amazed that TMF would say "good riddance" to those of us who think that, just maybe, "buy and hold" might not be the way to go. I recently examined my portfolio and calculated the amount of money I "would" have lost if I had not had the good sense to get out of the market in July/September/Early-October. The amount was absolutely staggering. As an already-retired person of "a certain age", I don't have the years ahead of me to get back those kinds of losses. Of course, Tom and Dave (and others at the Fool) do because they are still young. Sometimes I think TMF forgets that not everyone is 20- or 30-something. Frankly, at the moment, I wouldn't touch this market with an extremely long pole. Greed simply doesn't pay. I'll take that 60% out of the middle, thank you -- leaving the first and last 20% for others much braver (greedier?) than myself.

  • Report this Comment On November 21, 2008, at 6:35 PM, healeyingarage wrote:

    I'm not sure why it is "important" to label investers as "buy and holders" or "short termers" nor do I see value in proclaiming one as superior to another.

    The reason I joined Motley Fool was to try to discern what might be the best investment strategies for current markets and how best to achieve my long term goals. Using "buy and hold" would most likely have devastated my portfolio, similarly ill-considerd day-trading could have meant buying at peaks and selling at lows in this see-saw market. However, carefully considering value investing as well as market technical anaysis AND watching the emotional roller-coaster of the participants has served me well....Notice ALL THREE considerations are important. Further, learning to use options to permit gains during a down or sidewise market are important. TMF doesn't make many short or covered call recommendations, yet over the past 7 years, I don't think I'd have made any real financial progress without being able to use those tools. Thankfully, all I need are TMF recommendations as to which stocks to shun and which to hold to learn which stocks are good put candidates and which are good covered call candidates.... I'm seriously surprised to see how few people discuss those strategies...

  • Report this Comment On November 21, 2008, at 9:36 PM, talkmarket wrote:

    Markets are made of short term and long term investors. Its not right to say one is better than the other. Both have different investment objectives. There is no fits-all winner investment strategy. All depends on what you want out of your investment, isn't it? If you want to make some money from the market within an year, then you have to think and invest short term. There is nothing wrong in that. But you should clearly understand the risks or short term and be prepared to take the hits. Most of us just get carried away by the stories about people making big money in the short term but don't give proper thought to the risks involved in it.

    So its completely wrong to say no to short-termers.

    But on the other hand short-term thinking on part of the financial institutions to give improper credit to real estate investors was insane. The bosses in these companies are trusted by the shareholders to strategize and act to make companies profitable, not ruin it. They should be paying for what they did, create bad debts. Why are these big bosses not being sued? Ah! then again they are all well connected scratching each others back and investors left with losses. Sad indeed!!

  • Report this Comment On November 22, 2008, at 7:48 PM, treeman102 wrote:

    How will we ever forget this so called lost decade? We will be paying for it until we die. And the Ken Lays and the Bernie Ebers out there that swindled the american public will probably never spend a day in jail.

  • Report this Comment On January 09, 2009, at 3:23 PM, davidkubica1 wrote:

    Tired of people telling you to simpl buy and hold and everything will work out fine? The recent sell-off in the commodities market is yet another example of why investors should consider diversifying away from “buy and hold” strategies. First, I still believe that we are still in the midst of a long-term bull market in commodities. However, the downward moves we have seen in oil, gold, silver, and other commodities once agan shows investors that the commodity bull market will have several vicious pullbacks.

    For some investors, holding onto the long-term focus works. In essence, they implement a simple “buy and hold strategy”. They can easily ride the volatility and fluctuations that occur in their accounts. For most investors, however, these vicious sell-offs can often shake their confidence in the markets.

    Managed futures allow investors to diversify across several different commodity trading advisors that implement different trading strategies. Some might thrive in volatile market environments, while others might incur a drawdown. Some CTAs( predominantly trend followers) do well in trending market environments( whether up or down), but often incur drawdowns during choppy market environments. The goal is really to have a portfolio of managers that are diversified across a variety of strategies, markets, trading time frames, and style of trading. If you are interested in managed futures, you can try www.managedfuturesdepot.com. They usually have some pretty good programs that they offer. This one: http://www.managedfuturesdepot.com/NDXShadrach1108.pdf had a return in 2008 of over 128% and has averaged a monthly return of over 8% since its inception 5 years ago. The nice thing about these performance sheets is that you know they are authentic. Managed futures returns are regulated vigorously by the CFTC and are all stated NET OF EXPENSES.

  • Report this Comment On January 11, 2009, at 12:26 AM, thidmark wrote:

    Ken Lay is dead.

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