Take a look at those numbers, will ya! Rule Breaker, up nearly 9% today. That tops what most investments can achieve in an entire year! Let's all jump up and click our heels. Now, let's look at other numbers.
The Rule Breaker has returned 1,135% since its August 1994 inception. The Nasdaq has gained 380% over the same period, and the S&P 500 is up only 224%. Hey, what can we say? We're great. High-fives all around! Now, what other numbers can we consider?
Oh, look there. Eeee. Oh, no. Rule Breaker is down 24% this year and losing badly to the indices. Since the final day of 1999, 24% of this portfolio's paper value has floated away. Just like that. And here I was high-fiving you just a minute ago. You probably want to walk away and scrub your hand.
And yet, as you walk away, I do still want to celebrate. Not our underperformance this year so far, but our long-term outperformance. If you've outperformed the stock market indices long-term, too, than you should be celebrating as well -- rather than fretting about what the numbers look like since that magical renewal date, 01/01/00.
Which leads to a pet peeve I harbor: the nature of human nature to reset the clock every single year; to restart all over again, in a sense. In many instances, this is simply grand (to steal a phrase from the 1920s). Each year, we should try to improve ourselves. But each year, we should not erase the past so nonchalantly, especially when it comes to investing. Yet, this is exactly what the financial media and many mutual funds do: they start all over again, every single year. They set everything to zero and imbibe a new sense of danger and excitement to investing.
Isn't it exciting/frightening when in the first week of a new year the stock market gains/falls 5%? Either way, it's big news! It's headlines. It's a 5% move, one way or the other. We started at 0.00%. Now we're up 5%, or down 5%. Wow! And if it's down 5%, it suddenly looks like it may be "a down year." So, despite the fact that the S&P 500 has gained over 4,950% in the past 25 years, all that matters to the media is that, for example, the S&P began this new year down 5%.
Hey, media, so what!?
Alongside the mindset of structuring time by years -- or by mental datelines that we erroneously make as real as concrete walls in our heads -- comes the short-minded mentality that one should reconsider their investing strategy every new year. Just recently, CNBC ran a promotional blurb that crooned, "Hedge funds are up this year! With stocks down 24% since January, how are your investments doing in 2000? Not good? Maybe you should consider investing in hedge funds. They're not as dangerous as you may think, and they just may help you in years like this."
So, due to a negative return since January, long-term investors in Intel and Microsoft should sell their companies and consider a hedge fund? Great logic, CNBC. Now, if the media did not focus on pacing off the stock market's returns by day, week, and year, would this story have run? I don't think so.
Here's where my pet peeve bears elucidation. (Or at least I hope so. I hope that you'll find these thoughts worth something in your own investment life.) Instead of stating the pet peeve to you outright, I'll just ask you this: "Why must we reset the stock market's return -- the return that we quote daily around the world -- each and every year?"
In newspapers, financial websites, on the radio and TV, the only "long-term" number that you find in the numbers reported daily is the year-to-date return. And how long-term is that? It isn't. At all. And when the year-to-date return is a negative number (and it's bound to be half the time), it provides long-term investors, many of them beginners, the wrong message.
This year, the media has continually reported that the Nasdaq is down over 20% since January, the S&P is down as well, and so forth. Is this relevant to you? If it is, it's probably only because you have been conditioned to it. If we did not divide up our lives by year every year since birth, and then we suddenly began to do so, it would be ludicrous. We are all accustomed to the annual "reset button" now. In fact, if we're not careful, the year-to-date return risks becoming TOO relevant. If an investor focuses on the year-to-date return, they risk missing the forest for the trees (traders focus the "day-to-date" return -- even worse!). So, here is how I would love to see the stock market's returns displayed every day:
Since inception! Total return since inception!
We could only dig up the past 25 years at Fool HQ on the Bloomberg machine, and they show that the Nasdaq gained 6,702% from 12/31/74 to 12/31/99. The S&P 500 gained 2,043% over the same period without dividends reinvested, and 4,959% with dividends reinvested (a giant endorsement for reinvesting dividends, like Drip Port, if I ever saw one). So, why not state these numbers, or even more historical numbers, every day? Are they too large to be relevant to investors? Have most of us not been invested in the past few decades, so they're not very relevant?
One could argue both points. I would argue that they're relevant because they remind us that the general direction of the stock market is up. The S&P 500 index began at 1.0 in December 1925. It's now at 1,422. Can we report its total return since inception daily, rather than just since the most recent January 1? We want the whole picture, don't we? The "long-term trend"? (With a wink to the chart readers out there.)
Would this reporting be groundbreaking stuff? No. But different? A little. Why do it? For one, because the fact that the Earth just lapped the sun shouldn't be relevant to how you look at your investment results.
As time passes, I believe that the importance of annual returns could fall to the wayside as 5-year, 10-year and longer total returns take center-stage in the media and in investor's minds. Why? Because we are all privy to much more information now, and customizable information at that, due to the Internet. And we're all learning that your financial goals depend on your long-term return.
As for year-to-date -- who cares? Do you really care?
To close, it wouldn't be Foolish if I didn't point out again that the Rule Breaker is down 24% year-to-date. I'm not trying to make light of this. It's a giant 24% loss! Gruesome! We're losing this year. The pain! The illogical year-to-date pain! I can't wait until the Earth laps the sun so we can reset the clock again. Yes, resetting the clock will be illogically grand for us! Because no matter what, you can't "win" every single year. You shouldn't even try. When investing, try to win over decades.
Fool on!
P.S. You can catch Paul Larson (TMF Parlay) and myself in a Motley Fool Research chat tomorrow night at 7:00 p.m. ET. We'll be fielding your questions about "Internet stocks. We hope to see you there with a Fool cap on. Fool on!
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