Friday, July 4, 2008

Attention Deficit Investing

From the Desk of Joe Rollins

It occurred to me recently that the market’s volatility over the last year is partially due to investors being negatively influenced by certain financial television programs. I sometimes watch the CNBC show “Fast Money,” which seems to be focused on telling investors how to quickly get in and out of trades. The definition of long-term investing to the producers of this show appears to be a mere 48 hours.

After “Fast Money” airs, Jim Cramer’s show, “Mad Money,” begins with lots of hollering and “Booyahs!” Cramer was a very successful hedge fund manager, but I’m not so sure that he does the investing public much good. In a recent broadcast, Cramer launche
d into an exuberant dissertation on the poor state of the stock market and how uncomfortable the investment environment was at the current time.

After Cramer’s diatribe, he began the popular “Lightning Round” segment of his show. In contradiction to Cramer’s earlier apprehensiveness of the current investing arena, he gave nearly every stock discussed a “buy” rating. The inconsistency of his two positions could only lead an investor to utter confusion.

When I first started investing in the stock market in the 1970’s, my research was provided solely by the Wall Street Journal. I looked forward to receiving that paper – via snail mail a full two days after the original publishing date – even though the articles were often old news.

Thirty years later, I still receive the Wall Street Journal, but it is now delivered to my house the very day it is published. By the time the paper hits my front porch, however, I have typically already read all of the important articles and subsequent updates online. Isn’t it funny how quickly information more than 15-minutes old nowadays becomes outdated?!?!

The endless marketplace opining seems to have manifested and caused the investing public to be in a phase of speculating instead of investing. Stocks are selling at historic lows, and hedge funds are moving billions of dollars at the stroke of a pen. This is undoubtedly due to speculation and not investing.

The trade du jour is to go long on oil and short the financials. This has made oil trade at 25% above where it should be based on demand, while banks are selling at the ridiculously low level of 50% of book value. Neither of these positions can be supported by quantitative evaluation of either sector.

When an investor’s goal is to make money over the long-term, it is important to invest and not speculate. It’s not wise to trade day-in and day-out based on the infinite whims of the market, and folks who trade in such a manner will unquestionably lose money.

Some of my clients have asked why I don’t agree with selling to a cash position. While I agree that cash is a viable short-term investment, anything left in cash for longer than 30 days only guarantees a loss. Current cash balances are generating returns of roughly 2% while the inflation rate is now at 4%. While it’s always possible to lose money in stocks, that’s not guaranteed to happen. In fact, most stock market investors typically make a lot of money over time. Conversely, if you sit in cash in today’s market for longer than the very short-term, you’re guaranteed to lose money based upon the increase in inflation alone.

I know that investors aren’t comforted by the current state of the stock market, but I truly believe that if people stopped trading speculatively on a daily basis and instead invested for the long-term, everyone would make more money. “Fast Money” and “Mad Money” may be entertaining and even informative sometimes, but they are probably not the prescription for long-term financial security.