Invest With A Telescope... Not A Microscope

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Includes: DIA, QQQ, SPY
by: Wade Slome, CFA

Telescope-Microscope

It was another bloody week in the stock market (S&P 500 index dropped -3.1%), and any half-glass full data was interpreted as half-empty. The week was epitomized by a Citigroup report entitled "World Economy Trapped in a Death Spiral." A sluggish monthly jobs report on Friday, which registered a less than anticipated addition of151,000 jobs, painted a weakening employment picture. Professional social media site LinkedIn Corp. (NYSE:LNKD) added fuel to the fire with a soft profit forecast, which resulted in the stock getting almost chopped in half (-44%)…in a single day (ouch).

It's funny how quickly the headlines can change - just one week ago, the Dow Jones Industrial index catapulted higher by almost +400 points in a single day and we were reading about soaring stocks.

Coherently digesting the avalanche of diverging and schizophrenic headlines is like attempting to analyze a windstorm through a microscope. A microscope is perfect for looking at a single static item up close, but a telescope is much better suited for analyzing a broader set of data. With a telescope, you are better equipped to look farther out on the horizon, to anticipate what trends are coming next. The same principle applies to investing. Short-term traders and speculators are great at using a short-term microscope to evaluate one shiny, attention-grabbing sample every day. The investment conclusion, however, changes the following day, when a different attention-grabbing headline is analyzed to a different conclusion. As Mark Twain noted, "If you don't read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed."

Short-termism is an insidious disease that will slowly erode short-run performance and if not controlled will destroy long-run results as well. This is not a heretic concept. Some very successful investors have preached this idea in many ways. Here are a few of them:

''We will continue to ignore political and economic forecasts which are an expensive distraction for many investors and businessmen." - Warren Buffett (Annual Newsletter 1994)

''If you spend more than 14 minutes a year worrying about the market, you've wasted 12 minutes'' - Peter Lynch

"Excessive short-termism results in permanent destruction of wealth, or at least permanent transfer of wealth" - Jack Gray Grantham

On the flip side, those resilient investors who have succeeded through investment cycles understand the importance of taking a long-term view.

"Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed." - Peter Lynch

"The farther you can lengthen your time horizon in the investment process, the better off you will be." - David Nelson (Legg Mason)

"Long term owners are more relaxed, more informed, more patient, less emotional." - John Templeton

"If you are really a long-term investor, you will view a bear market as an opportunity to make money." - John Templeton

"Long term is not a popular time-horizon for today's hedge fund short-term mentality. Every wiggle is interpreted as a new secular trend." - Don Hays

"In the long run, one of the greatest risk to your net worth is not owning stocks. Bonds do not grow. They can only return their face value at maturity…Inflation is a silent, insidious tax that erodes your net worth…Fortunately, there is an easy way to keep pace with and even beat inflation, and this is stocks." - John Spears

"In the short-term, the stock market is a voting machine; in the long-term a weighing machine." - Benjamin Graham

There has been a lot of pain experienced so far in 2016, and there may be more to come. However, trying to time the market and call a bottom is a fruitless effort. Great companies and investments do not disappear in a bear market. At times like these, it is important to stick to a systematic, disciplined approach that integrates valuation and risk controls based on where we are in an economic cycle. Despite all the recent volatility, as I've repeated many times, the key factors driving the direction of the stock market are the following: 1) Corporate profits; 2) Interest rates; 3) Valuations; and 4) Sentiment (see also Don't Be a Fool, Follow the Stool). Doom and gloom "Death Spiral" headlines may currently rule the day, but the four key stock-driving factors on balance remain skewed towards the positive…if you have the ability to put away your microscope and take out your telescope.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in LNKD or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.