Long Term Investing Appears to Have Gone Out of Fashion

Includes: DIA, QQQ, SPY
by: Vincent Fernando, CFA

Business Insider provides yet more evidence that much professional "investing" is actually short-term trading and speculation... The average holding period for New York Stock Exchange stocks has fallen to only six months (click to enlarge).

Click to enlarge

can we please stop pretending that what most fund managers are doing every day is "investing"? Holding stocks for six months isn't investing. It's trading. And because trading is a negative-sum game--one largely focused on trying to figure out what everyone else is doing--it is really speculating.

While you can place some blame on high frequency traders for skewing the data, Business Insider points to week-to-week performance benchmarking as one culprit. Our sell side experience leads us to agree, even monthly performance benchmarking is ridiculous for measuring fundamental investing given the vagaries of the market in the short term. The result is that a lot of fund managers have no choice but to engage in speculative trade-chasing covered by heaps of fundamental BS to maintain their firm's fundamental, disciplined image.

When you're speculating, there's no reason to pay attention to things like fundamental analysis, valuation, future cash flows, and all the other stuff they teach you in security-analysis school. For holding periods of less than six months, those things don't mean jack. Over holding periods that short, the game is all about figuring out what everyone else thinks and then gambling that you'll be right and they'll be wrong.

So remember that next time your favorite fund manager sends you a note patting himself on the back for his investing prowess. What he's really talking about is speculating.