Rebuttal: Long-term investing alive and well

Last week, advisor.ca ran an article entitled “Long-term investing is dead: Gundlach”. It contained a logical and well-reasoned argument with supporting evidence. The conclusion: “The bottom line for investors is they can no longer have a long-term investment horizon, which is widely considered the key to success.”

My response? “Ridiculous. Of course long-term investing isn’t dead. Quit trying to be a tabloid.”

Long-term investing is far from dead; it’s the only type of investing there is. If you have a short timeframe, you can be a saver or else you’re a speculator—but you aren’t an investor.

The editor invited me to write a rebuttal, and offered the presentation materials from which the original article was drawn. I said I didn’t need them: doomsday predictions for the future are inherently unreliable and often horribly inaccurate.

That goes for any predictions. Before the Stanley Cup playoffs began, the consensus was the Vancouver Canucks and Pittsburgh Penguins would face off in the finals. And these predictions weren’t just from casual hockey fans; this is what people who make their living analyzing the sport were saying. A lot of good those predictions were: both the Canucks and the Penguins were bounced in the first round.

The financial world is obsessed with trying to predict the future. But the collective track record of these wannabe soothsayers is abysmal. As Peter Lynch famously stated, “Every year I talk to the executives of a thousand companies, and I can’t avoid hearing from the various gold bugs, interest-rate disciples, Federal Reserve watchers, and fiscal mystics quoted in the newspapers.

“Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.”

This penchant for predictions is so pervasive that there was even a recent story where a guy was making his annual economic forecast using one of those Magic 8-Balls. Obviously he was writing tongue-in-cheek, but last year the 8-Ball ended up beating many of the financial gurus in predicting oil prices, gold prices, inflation, and the pace of the economic recovery.

Whenever I see a story like “Long-Term Investing is Dead,” I think back to the infamous cover story that ran in BusinessWeek: “The Death of Equities.” This was another logical and well-reasoned argument with supporting evidence, and the conclusion was “the old attitude of buying solid stocks as a cornerstone for one’s life savings and retirement has simply disappeared.”

The article, which claims systematic and insurmountable mega-problems will push the planet’s economies over the precipice to certain destruction, was written in 1979, the inception of the greatest bull market in history. It’s actually one of the worst market calls ever made. Compare the real market results from then until now. It will put the “Long-Term Investing is Dead” article in proper perspective. This time isn’t different.

So does the world have challenges? Of course. But, people continuously forget it is these very challenges that present opportunities.

We would be well served to keep Warren Buffett’s hamburger quiz in mind:

“A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time, but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

“But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

“Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying.

“This reaction [doesn’t make] sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Accept the future is unpredictable, and focus on helping your clients to make smart decisions, consistent with their financial objectives. Do that, and predictions about what will happen in the next five minutes are immaterial.

Pretending you can forecast the future, time the markets, or even fully comprehend the market’s innumerable variables, and summarize it in a few short sound bites is self-deceptive behaviour.

The “Long-Term Investing is Dead” story can just fade away. As a lifelong Canucks fan still smarting from their humbling early exit from the playoffs, I can tell you that’s the proper place for predictions.

The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St. John, B.C. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad can be reached at brad.brain@manulifesecurities.ca.