Long Haul Investing


Yesterday, I met with a person that is crossing the country and writing a book. She was interested in interviewing traders, because supposedly we think different! Anyway, we spoke for about an hour. One question she asked me piqued my interest. She asked, “Is there such a thing as long haul investing anymore?” That is a hot topic these days with all the market volatility.

Certainly, it’s really hard to value the market today. It is really dependent on forces beyond anyone’s control, committee rooms in Washington! That is a crying shame. Generally, markets were valued based on company profits, financial statements, and what people saw going forward. Washington sat on the sideline and watched.

Given the melt down, Washington needed to get more involved. The DC people needed to remove the root causes of the crash. Fannie, Freddie, some of the regulations that caused incentives in the market to misalign. Unfortunately, they really missed a golden opportunity. This Financial Regulation bill is one of the dumbest bills to be passed by a Congress. It’s not going to affect much, has some dangerous language in it, and will increase costs while decreasing borrowing. So, maybe those guys in committee rooms should have twiddled their thumbs.

This brings us back to long haul investing. The way most people define it, long haul investing is putting money away that you will hold for more than 20 years. In other words, you really don’t care about day to day movement in the market. You do care about creating a climate for growth. As a matter of fact, massive declines just make the long haul strategy pay off more if you are putting money away! Usually, they don’t persist and are short lived. Even the worst market in US history, the 1930′s, only persisted for 10 years. That’s a blip to the long haul guy.  It is painful to live through.

There are two ways to play this market. First is follow the Fama’s theory. Invest in the broad market. Pick a no load fund that replicates the S+P 500. REinvest the dividends. You will make 8% over the course of time. This works, and truthfully, no one can beat the market. No one. The second way is to invest a chunk of your money in the market using Fama, then take a portion of your money and invest in things that you really understand and know. For example, if you are really proficient in software, you might want to allocate some money to software companies that you really understand and think can grow faster than 8% YOY. You can also use options to juice the gains in your portfolio, but understand that adding this juice brings higher risk. Eventually, this bear will transcend to a bull. The money you invest today will grow and you’ll be okay.

Even Warren Buffet has said the same.  He decries money managers.  Why pay a portion of your hard earned money to someone when it’s simple to invest it yourself?  Investing isn’t rocket science.  But people do have different risk tolerances which changes how they perceive investing, and alters how they invest.

The real problems right now are that government is not creating a climate for growth. The people at all levels of power in DC are doing everything that they can to put up impediments to growth. Here are some of the things that they have done: Increase the capital gains tax, increase the personal income tax(and marginal rates), passed socialized health care, increased fees(which are taxes), increased the power of unions(which cut profitability), increased the deficit, increased government spending. Obama doesn’t believe in free markets-and neither do any of the heads of any committee in Congress.

You will lose money if you try to trade this market day to day. No one can anticipate the wild swings. Trading sounds sexy. Some traders do make a lot of money. But the days of the guys on trading floors earning a huge buck are over. The industry is consolidating. The huge volumes of human traders are now being retired and around 30 high frequency traders are dominating markets. This is neither “good” or “bad”, it just is. HFT traders increase the volatility in the market. Moves are larger.  Volume has grown, but liquidity at a certain price is less. Trading takes place at edges of ranges, not through an entire range. This is why you cannot trade and win anymore. Only way to win is position trade over periods of time.

Long haul investing isn’t dead. It’s actually the best strategy for attacking the current market conditions. Especially for the average investor.


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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