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.
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.