The Death of Long Term Thinking

A "Tongue in Cheek" article by Motley Fool Analyst and contributor, Morgan Housel

 Long-Term Thinking: 1800-2013
By Morgan Housel

Long-Term Thinking died last year. His last true friend, Vanguard founder Jack Bogle, was at his side. He was 213 years old.

Long-Term Thinking lived an illustrious life that began at the start of the Industrial Revolution, when for the first time, people could think about more than their next meal. But poor incentives and the rise of 24/7 media chipped away at his health. The final blow came when a trader on CNBC warned that a 10% market pullback -- which has occurred on average every 11 months over the last century -- could be "devastating" for investors. "That's it," Long-Term Thinking whispered from his hospital bed. "There's no more room for me here." He died shortly thereafter as Bloomberg published its daily tally of how much the net worth of the world's billionaires had changed in the previous 24 hours.

Long-Term Thinking endured the Great Depression, world wars, and spiking interest rates in the 1980s. But the last five years proved too much, as he fought for relevance with cable news, Twitter, and derivatives. He was hospitalized in May 2010 after pundits lost their collective minds over a "flash crash" that made a few stock prices freeze up for 17 minutes. "Computers froze for 17 minutes and they literally think American industry vanished," Long-Term Thinking told his psychiatrist. "These people are insane."

Fifty years ago, the average stock was held for more than eight years, according to LPL Financial. By 2010, the average stock was owned for five days. Fifteen years ago, S&P 500 companies spent more than 40% of available cash flow on capital investments. That fell to just over 25% by 2007, with the difference going mostly to share buybacks, likely to boost option-based compensation. "Our culture has an endemic problem of short-term thinking," Long-Term said in his final speech in November. "Years have become months, months have become days, days have become milliseconds, and milliseconds have become careers. However much you think you're winning in the short run, you're losing in the long run."

Long-Term frequently blamed media. Louis Rukeyser's Wall Street Week went off the air the same year Mad Money, Jim Cramer's daily investment show, debuted. The number of important financial events hasn't changed since Rukeyser could cover a whole week's news in an hour -- just the amount of drivel, gossip, nonsense, and hyperbole. It was too much for Long-Term Thinking to handle. Once the bastion of rational thought, he became the laughingstock of the financial world, repeatedly teased for his indifference to candlestick charts and the 50-day moving average.

Some mourned his passing. Peter Burton, a hedge fund manager from Greenwich, Conn., said, "It's sad to see him go. Everyone in my field knows he was right. With our own money, we think years out in the future. But with clients' money, I have three months to be correct, or I'm out of a job." Shaking his head, he continued: "The dirtiest secret in finance is that few of us are incentivized to do what's right. Your pension fund, your 401(k), and your kids' college funds probably have a time horizon measured in decades. But you pay me based on how I perform against my peers every 90 days. It's such a joke."

In lieu of flowers, his family asks that you turn off CNBC and stop checking your brokerage account.

Creating wealth or preserving wealth - Why chose?

What should I do with my nest egg? Where should I invest?  How should I invest? Gold, Silver, Stocks, Bonds, Funds?  Can you help me decide please?

These are some of the questions investors have when they seek financial help. Fund managers and bankers know these questions will be asked. They know, because they are quite familiar with the driving force behind those questions.

Bankers, fund managers and money managers often break down clients into two categories. Those who want to create wealth and those who want to preserve wealth. Now, ask yourself this simple question: Are you in either camp?  If so I am sure you have your reasons. Some of you believe your portfolio, which may be fairly substantial or even just adaquate, should be protected and preserved for your retirement years. That, my friends, seems to make good common sense, Does it not?

Jim Cramer admits to manipulating stock prices when he was a fund manager.

Image by talkradionews via Flickr

When I was a policeman, I always felt relief when a perpetrator finally admitted to his wrong doing. It was a corroboration of the evidence that I already had, coming from the person who did the dirty deed.

Humans have an innate yearning to "come clean" on their sins, and that is the reason why so many people actually admit the wrong doing.  It gives them a sense of relief not unlike the relief felt by Catholics when confessing their sins to a priest, and then doing penance for their sins. The relief is instant.

However, when such a confession happens in a simple conversation between an interviewer and a guest on T.V., it sometimes goes either unnoticed, or unappreciated, by the people listening, as their interest did not, at first, lie with hearing a "confession"! It essentially gets lost in the context of the greater interview.

In the interview in question, however, one would have to fall asleep to overlook the confession of an otherwise honest man who often "says it like it is".  Jim Cramer of "Mad Money" fame on CNBC did exactly this in an interview which has been posted online.

To listen to that "confession" on YouTube (see Jim Cramer admits ) is to understand that the markets today, are susceptible to a whole range of manipulations, from Central Banks, to fund managers to the glorified salesmen, masquerading as investment advisers, who are paid huge sums by Wall Street firms to corral investors into believing in the "integrity" of those firms.

Jim is merely an honest man who admits to some "otherwise legal" manipulations of stocks for the benefit of his fund and his clients. However, if you multiply by the hundreds of otherwise honest fund managers doing similar manipulations on behalf of their funds and clients, by the number of out and out con men such as Bernie Madoff, who have entered the great Casino, through the front door of Business Schools, contacts and friendships, it is little wonder that the average Joe has been running for the exits in the past few years.

Folks, as comedian George Carlin once proclaimed, "Wall Street is a big club, and your not in it"!

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Pigs really do get slaughtered! So don't be one!

"Bulls make money, bears make money, pigs get slaughtered"
Jim Cramer - Mad Money


Yes, Jim Cramer can drive you nuts with his ranting and raving about stocks and investing. Sometimes he is right, sometimes he is wrong (just like the rest of us) but of all of his rantings, I sure like the quote "Bulls make money, bears make money, pigs get slaughtered". Jim drives home this simple thought every night on his CNBC show, Mad Money.


Jim's style can grate on serious investors and newbies alike, but one thing is for sure, he does try to enlighten the small retail investor and this quote is far and away, one of the best pieces of advice he gives every single night to his viewers. If you don't listen to this golden piece of advice, you stand to lose your shirt, and more.

If your investment strategy is to throw money on hot stocks and hope for a home run, then you should change the game. You are better suited to the game of craps at the local Casino. With that attitude, you may actually do better at the Casino, than in the market.

Economic forecasts are never certain. If you put three economists in the same room, you will end up with three entirely different opinions of where the economy, and by extension, the market is headed. Don't invest in stocks because of an economic forecast! Invest only when you have done your own home work on an individual stock, it's market niche, it's earnings/potential, it's management, it's trading range, and analysts opinions. (Actually we like stocks that are under the radar of analysts, but is for another post).

The bottom for traders is this!  If you have a stock that is up say 20% to 30% and you don't take at least "some" profit, then consider yourself a pig, and expect to get slaughtered. You don't have to sell because a stock is up, but taking "some" money off the table when you are up is simply a fact of good trading.

If as opposed to "trading" you consider yourself a long term investor and you are not concerned with short to medium term profits, you may still wish to "take some off the table". It just make sense because, as you've heard many times, "a bird in the hand is worth more than two in the bush"!

And Pigs can't fly! but of course, you already know that!

Good investing-   HP


PS: and by the way, don't forget to pay down some debt this year. A great investment is not to owe more money than you have. You don't want that burden in retirement, especially in this environment. 

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Signals in the bond market are not a positive sign for the recovery.

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In a recent article in Breaking News, Unhappy Conundrum Edward Hadas sheds some light on this question as he points out that, while the bond market is hard to read, the falling yields in the bond market do not bode well for the immediate future of the American economy and market, no matter what explanation one has for them. In the final analysis, bond holders are creditors who like to keep their sights on the bottom line, as opposed to the more optimistic stock market share holder.

Last fall, during the crash, the junk bond market spread was 22 points higher than treasuries, a number that reflected real fear. Today it is at 10 reflecting less fear, but not the comfort level of 5 which is normal. If you want to take a measure of market sentiment, you ignore the bond market at your own peril.

Couple this information with the spike in gold prices ( see: hedge funds buying gold ) and the fact that, insider selling is increasing at a rate of 30-1 as opposed to buying into this market, and you have some clear indicators there is trouble ahead. Add to that the fact that the "cash for clunkers" program is over, there are still 1.5 million houses backlogged for sale, 40% of home owners will be "under water" with their mortgage by 2011, the American consumer is adverse to buying anything right now, the commercial real estate market is headed for a cliff, and newbie Chinese investors are bubbling their own stock market at this writing.

As I warned in several previous entries, " when everyone else is laughing hysterically and pointing up to the sky " on this roller coaster ride, it will be time to get off. Well, they are not laughing hysterically yet, but some are chuckling, getting giddy, and the bull heads of CNBC have gotten out their pom poms. Hell, even some very smart people are cheering from the sidelines.

I've sold much of my bank stock. Have kept some small companies with great upside, and I have bought a gold stock this week that I believe has great upside. Now don't get me wrong, I'm not a wimp. I am a realist. In many ways, I hope I am wrong. I just don't believe I am.

Now, what have you done with your portfolio as the Witch of October approaches? Hopefully you are watching over it like a mother hen, and have not given it to some uninterested money manager who is concerned with his own portfolio. Get a good investment adviser and always sit down with him/her every few months to go over your portfolio.

After all, would you let some stranger have complete control of your home while you were living in it? Your investments are "yours" so look after them.

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An uneven economic recovery starts with a rare summer rally!

Image by Getty Images via Daylife

Stratfor Global Intelligence is forecasting an uneven recovery in the world's economy. Back in June, Liz Ann Sonders, the chief economist at Charles Schwab, called the Recession over (she was one of the first to see it coming back in 2007) Yesterday, Michael Hartnett, chief global equity strategist with Bank of America Merrill Lynch (yes that's the new name) also declared the recession is over. So has Finance Secretary, Timothy Geithner, as well as just about every talking head on CNBC

Problem is, the talking heads would have you believe it is the beginning of a bull market that is going straight up. My money is on the Stratfor intelligence report, because they are quite thorough in their research and have no real ulterior motive for promoting the recovery story, and their report is tempered by where the recovery won't happen (Japan for instance).

To give credit where credit is due, the CNBC crew, (Kudlow, Cramer , Fast Money) have all along been saying that the country that led everyone into the Recession, the USA will be the country that will lead the way out. Got to give them credit, it is the general consensus. However, this was not a hard call to make, as it is what has occurred in every major recession in the past.

So, what now! Well, as most investors have fled the market since the spring rally, many of them will miss the summer rally which is starting now. A summer rally is an anomaly. It doesn't often happen as many investors still cling to old habits and standards like "sell in May and go away". The problem with that mentality is the recent and powerful introduction of electronic trading systems that can be accessed from anyone's blackberry. In this new era of international investing, you can't just go on vacation and forget about your portfolio, because you stand to lose much of the gains for the year. (or losses, depending on the situation).

If you are coming back to the market in the fall, you may miss most of this years buying opportunities which exist right now! Yes, buying opportunities! Remember this:

1. Bull markets always climb a wall of worry.

2. No one sees a bull market until it is in mid to late stages.

3. Most profits are made in the first weeks/months of the bull market.

4. Bull markets "love" inflation.

5. A weakening currency always causes inflation.

6. Banks always lead a bull market rally. (Goldman Sachs just made their largest quarterly profit in history)

Some words of warning here. The United States will be fighting the Deficit Dragon for years to come, thanks to the Dubya's tax cuts and the gluttony on Wall Street. The jobless ranks now approach 10% and will go higher. Manufacturing in North America is still decreasing. Banks have been rescued by massive inflows of Government stimulus money which still has to be flushed out of the system. The Derivatives Debacle is still not solved and won't be anytime soon. As bad as this sounds, Europe's banks are in worse shape and their Governments are either in denial or are hiding their heads in the sand. Britain's Banks have virtually been nationalized. Japan is sinking further, and has been for over 10 years. The BRIC countries may be a bright light in all of this as wall street starts another glutenous party on the backs of U.S. Citizens.

Many companies will report great third quarters, due mainly to the massive job cuts, because they have already completed most of their write downs.

How all of this will affect your retirefunds is between you and your financial adviser. Hopefully you are talking to him/her this week.

Maybe a simple Index Fund which costs less than every other fund out there, and usually beats 60% of all fund managers, will do. Whatever you chose to do, DON'T sit on the sidelines, or you will miss a great party.

Now let the jobless recovery begin!

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Even a broken clock is right twice per day!

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There are investors and there are traders. Traders trade! Investors invest! However, there is one thing they have in common. None of them can "time the market". Truly, if they could time the market, many of the talking heads on CNBC would have made billions on last years crash, or this springs bounce, instead of keeping their jobs trying to sell us on the benefits of the "hot stock of the day".

For the average Joe or Jill, a good practice is to "Invest for the long term" in increments using dollar cost averaging (ie: have your investment money put into your favorite mutual fund every paycheck) so that you can level out the gyrations in the market. If you are a little bolder and want to do some of your own homework, then Invest in individual stocks of solid companies with great products, market niches and good management

No one is right all the time! Not even the investment greats like Warren Buffett or George Soros. If they make big mistakes, and they do, then how many more mistakes are made by the coffee fueled, adrenaline pumped, talking heads on CNBC (fast money, Cramer, Kudlow, Kneale etc) Just because you took their advice and got lucky once, doesn't mean they are going to be right next time. They make mistakes, just like you do. Just like I do. Just like we all do.

It is important to do your own homework when investing. If you don't feel you have the time or expertise and you just want to invest in mutual funds, then at least do enough homework to pick a good manager. Investing in mutual funds is essentially investing in good management. 60% of fund managers today "Do not beat the Index". In other words, if you just invested in a basic index fund, with a lower fee base (because it is tied to the Index of the market you are investing in) on average, you will beat 60% of the mutual fund managers out there who get fat fees, for their so called expertise.

Nobody sees a bull market in our near future right now, but remember this. Bull markets always climb a "wall of worry". Bull markets are never identified until most of the profits are already made. Bull markets love inflation. A weak currency (read u.s. dollar) always increases inflation. With the current trend to deflation, markets in turmoil, with investors sitting on the side lines and the Chicken Little's clucking that the "sky is falling", Now may be a great time for contrary investors to take the opposite view and invest in a basic Index fund that costs less than 1% in fees. Or maybe not!

You can always keep your dollars on the sidelines, where they are sure to lose value over time. You could invest in mutual funds administered by a good manager who's track record shows a consistant return better than the Index.

Or, you could act on the next hot tip from one of the talking heads on CNBC. After all, "even a broken clock is right twice per day"!

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