Yesterday on Bloomberg two respected Street professionals\u2014blogger Barry Ritholtz and strategist Tony Dwyer of Canaccord Genuity\u2014were discussing the topic of long-term investing in equities, Buffett style. They basically concluded it was impossible for the average individual investor to be a long-term investor. I quote, with slight changes in wording to improve clarity:<\/p>\n
Ritholtz<\/strong>: \u201cMost people can\u2019t do what he [Buffett] does, it\u2019s that simple. . . .They lack the belief system, they lack the discipline and they lack the long-term perspective. You can\u2019t invest like Warren, so why even try? \u201c<\/p>\n Dwyer<\/strong>, when asked about investors who hold stocks not just for 5-7 years but for 12-15 years: \u201cThe issue is, it is impossible [to invest for 12-15 years] unless you are investing as though you own the business instead of a stock symbol . . . because the odds are that at some point over a five or seven year period there will be a recession or a credit event and you will shake most people out.\u201d<\/p>\n Three reactions to the wisdom of Barry and Tony (B&T)<\/strong><\/p>\n First, as a characterization of how \u201cmost\u201d individuals invest, they are correct<\/strong>; most people don\u2019t own stocks for years and years.<\/p>\n Less obviously, they are also describing how most Wall Street pros invest<\/strong>. Worried\u00a0about fund performance, portfolio managers try to dump stocks that are out of phase with the economy or are going through a difficult period. Conversely, many PM\u2019s crowd into \u201cwhat\u2019s working\u201d \u2013 healthcare, at the moment; tech in the late 1990s; energy in the late 1970s. The mediocre performance of most mutual funds suggests this is difficult to do successfully, especially after taxes. And it is very risky to aggressively overweight a popular sector.<\/p>\n Third\u00a0it is ridiculous to claim that people \u201ccan\u2019t\u201d be long-term investors or that it is \u201cimpossible\u201d to invest with a fifteen-year horizon<\/strong>. On the contrary, this is the way most individual investors should invest\u2014hold their good stocks for decades and dumping the mistakes. They should own a mix of mature but still growing \u201cblue chips\u201d and some smaller, high-quality growth companies that either pay a dividend or eventually will do so. I call this \u00a0\u201ccreating your own conglomerate<\/strong>\u201d which has four advantages:<\/p>\n An underlying premise of \u201ccreate your own conglomerate\u201d is that macro trends are not predictable. As Larry Summers recently noted, economists never accurately predict recessions. And totally weird, unpredictable stuff (like a 50% drop in oil prices or zero Fed funds rate six years into an economic expansion) happens all the time. \u00a0Focus on buying good businesses that benefit from secular economic and social trends.<\/p>\n Mother Biggs, Inc.<\/strong><\/p>\n A good example of what I am talking about is the mother of the late, great Morgan Stanley strategist Barton Biggs, whose investments were described in Mr. Biggs\u2019 excellent book Hedge Hogging<\/em>. Mother Biggs turned a small fortune into a large one by owning a portfolio of growth stocks selected by her sons, who made occasional adjustments to the portfolio.<\/p>\n What It\u2019s Not<\/strong><\/p>\n Just to be clear, here is what \u201cCreate your own conglomerate\u201d is not. It is not:<\/p>\n Don\u2019t get me wrong; these are perfectly fine ways to make money in stocks. They\u2019re just not part of the \u201ccreate your own conglomerate\u201d approach and in any case are best left to professionals who have the time and expertise to execute these strategies effectively.<\/p>\n B&T, Meet Wendy<\/strong><\/p>\n She\u2019s no Warren Buffett, but she is<\/strong> better looking. And she is a long-term investor (and a relative of mine) who does what B&T deem to be \u201cimpossible\u201d \u2013 buy boring blue chips and mid-sized \u201cgrowth stocks\u201d and hold them for years and years. She showed me the brokerage statements documenting a few of her more successful holdings:<\/p>\n Admittedly these are some of her better investments, and there were times in the past when they looked like duds. For example, during the 2008 real estate bust Starbucks (which had over-built to meet Wall Street\u2019s expectations) plunged 74%; the company had to shut 500 stores and bring back the founder to revive the company. Altria was cut in half in the 1993 \u201cMarlboro Friday\u201d sell-off, when it announced an earnings disaster after losing market share to discount cigarettes. Wells Fargo was cut in half during the financial crisis; Borg Warner declined 68% and eliminated its dividend.<\/p>\n Another admission from Wendy: A few investments in apparently solid, widely owned \u201cblue chip\u201d stocks turned out to be disasters. Wendy bought shares of General Electric for 42 in 2001; now the stock is languishing at 25. And don\u2019t even ask about the Lucent shares she bought in 1999. Wendy claims to have gotten better at avoiding bubble stocks like Lucent, and selling losers before they turn into terminal disasters. I have my doubts.<\/p>\n Three Co-Conspirators Against Long-term Investing<\/strong><\/p>\n Wall Street pros<\/strong>, such as B&T, who try to own the right stocks for a given economic environment. They are constantly on TV and Radio opining about the best stocks to own, given current macro trends, valuations, and investor sentiment.<\/p>\n Wall Street<\/strong> sell-side firms that peddle whatever is \u201cnew and different\u201d because new products that have not yet been commoditized have higher profit margins. Because they are geared to selling, brokerage firms tend to push whatever is in vogue and easy to sell.<\/p>\n The financial media<\/strong>, which is culpable on two fronts:<\/p>\n We need more articles providing level-headed advice about how to construct a sensible portfolio of high-quality stocks you can own for the long term. Wall Street firms should put more effort into helping clients do this, charging a reasonable fee for same.<\/p>\n Copyright Thomas Doerflinger 2015. \u00a0All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":" Yesterday on Bloomberg two respected Street professionals\u2014blogger Barry Ritholtz and strategist Tony Dwyer of Canaccord Genuity\u2014were discussing the topic of long-term investing in equities, Buffett style. They basically concluded it was impossible for the average individual investor to be a … Continue reading \n
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