Long-Term Thinking in a Short-Term World

"WAKE UP! They are all about you; all around you!"
-- Street Preacher, John Carpenter's They Live

In John Carpenter's 1988 cult classic They Live, society has been subliminally subverted by profit-minded aliens bent on fostering a culture of conspicuous consumption. Stimulation to mindlessly consume is hidden on every billboard, every magazine cover, every television program, and even on the dollar bill.

Perhaps I'm being paranoid, but I see parallels with the investing world, and, unlike the movie, there's nothing subliminal about it. In fact, it's bloody near everywhere.

Just breathe
Look at the overwhelming and increasingly short-term focus of our investing world. It's there in multiple 24-hour business television channels. It's present in Jim Cramer and his "Lightning Round." It exists on the Fool message boards, or the much maligned (often with good reason) Yahoo! (Nasdaq: YHOO  ) boards. Heck, it's implicit in every quote service disclaimer: "Quotes delayed 20 minutes." Can someone explain to me why we should care about 20-minute delayed quotes? What investment-thesis-altering event are we going to miss in that delay?

In the introduction to Hewitt Heiserman's excellent book, It's Earnings That Count, Vanguard Group founder John Bogle cites the turnover of the average fund as being 110% in 2002. That's a mean holding time of 11 months. Have the mutual funds with a long-term outlook disappeared?

Ignore the market
I live in Canada, where the market index is heavily weighted to high-flying energy stocks. The Toronto Stock Exchange is up nearly 15% year to date, versus a flat S&P 500. Yet, despite this performance, I've had two close family members in the past two days call me to ask, as falling oil prices provoked a 4% market retreat, "What's going on with the market?" Who cares? Seriously, if you'd been told at the beginning of the year that the market would be up 15% after nine months, wouldn't that have been cause for celebration? Yet the focus is on short-term worries.

Look at a company like Garmin (Nasdaq: GRMN  ) , which I've written about in glowing terms before. After going public in December 2000, imagine an investor who bought soon after and only looked at year-end prices:

Date Price One-year return CAGR* S&P 500 one-year return S&P 500 CAGR
Dec. 31, 2000 $19.75 N/A N/A N/A N/A
Dec. 31, 2001 $21.32 7.9% 7.9% (13.0%) (13.0%)
Dec. 31, 2002 $29.30 37.4% 21.8% (23.4%) (18.4%)
Dec. 31, 2003 $54.48 85.9% 40.2% 26.4% (5.6%)
Dec. 31, 2004 $60.84 11.7% 32.5% 9.0% (2.1%)
Oct. 12, 2005* $62.51 2.7% 27.2% (2.8%) (2.4%)
*Compound annual growth rate.
**Year to date.


Looking simply at the table above, would our hypothetical investor be satisfied with beating the market by an annualized 30 percentage points? Would she, ex post facto, agonize over the 48% stock price decline in the spring of 2004 or the 36% decline in the spring of 2005?

Sure, Garmin is a sample of one, but carefully analyzing the underlying business of all our potential investments -- and then ignoring short-term worries -- would have spared us ulcers in any number of companies.

The truth is out there
Admonitions to listen to and emulate the masters by having a long-term focus are everywhere. Warren Buffett has advised investors to act as if their investing careers were limited to a lifetime decision card with just 20 punches on it, and has expounded that Berkshire Hathaway makes investments in businesses, caring not a whit if the market closed for 10 years. Phil Fisher advocated a philosophy of selling almost never. Peter Lynch has said that most of the good things that happened to the stocks he bought took two or three years to develop. Fool co-founder Tom Gardner has adopted this philosophy in Motley Fool Hidden Gems, urging investors to hold recommendations for at least three to five years.

The masters have the success to back up their methods, and yet every day the collective "we" ignores received wisdom. You can see it every time a message board posting says something along the lines of: "Stock X has gone down 5% today, WHAT'S HAPPENING?" Take a look at the returns of some selected Motley Fool Stock Advisor and Hidden Gems picks:

Company Initial pick date Price on day of pick Returns to date CAGR to date Declines of more than 15% Largest decline
CNS (Nasdaq: CNXS  ) Aug. 28, 2003 $11.18 106.9% 40.8% 2 (35%)
Electronic Arts (Nasdaq: ERTS  ) April 12, 2002 $29.95 71.8% 16.7% 5 (34%)
Pixar (Nasdaq: PIXR  ) March 7, 2003 $26.56 81.9% 25.8% 2 (24%)


Those are outstanding returns, to be sure. Yet, a visit to their respective message boards will find posts just like the one above, even with the rising share prices. The messages around us suggest that the masters' words are too often falling on deaf ears.

The Foolish bottom line
A professor friend of mine laughed at the behavior of the financial set, particularly with respect to the technology bubble and subsequent bursting. To paraphrase, he said that an entire industry forgot its root principles in its quest to justify ever-higher stock prices, making up new metrics when the old ones didn't give the desired answers. In one sense, he's right; ever-crazier justifications were put forth. But in another sense, he's wrong. Those preaching that valuation mattered -- that Cisco (Nasdaq: CSCO  ) at 184 times earnings was illogical and that stock ownership was business ownership -- never ceased their message. We just stopped listening.

For related Foolishness:

Fool contributorJim Gilliesowns shares of Garmin, but no other companies mentioned. He loved watching They Live when he was young. Nowadays, watching Jim Cramer (BOO-YAH!) gives him a headache. Electronic Arts and Pixar are Stock Advisor recommendations. CNS is a Hidden Gems pick. The Motley Fool has adisclosure policy.


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