Long-Term Investing: The Best Defense Against Wall Street

Includes: BRK.B, COP, GS, JPM, KO, XOM
by: Tim McAleenan Jr.

Mark Cuban, the owner of the Dallas Mavericks, recently offered some interesting thoughts in an interview with the Wall Street Journal. Because Cuban has been a long-time critic of high-frequency trading, the WSJ asked Cuban to explain his concern about rapid fire trading. In response, Cuban offered this:

"When the flash crash hit, that got me looking at algorithmic trading and the state of the market. I came to realize that the stock market no longer knew what business it was in. I wrote a blog that basically said that the markets for equities of all kinds had evolved to a platform for hackers.

That got me looking further into issue of high-frequency traders. They are the ultimate hackers. They're running software programs that have one goal, and that's to exploit the trading systems as early and often as possible. As someone who wrote software for eight years and who keeps up very closely with the technology world, that scared the hell out of me. The only certainty in the software world is that there is no such thing as bug-free software. When software programs are trying to outsmart other software programs and hack the world's trading platforms, that is a recipe for disaster."

These are the kinds of reasons why I have no interest in short-term trading. Not only am I at a tremendous disadvantage because I lack the skill to predict general price movements each day, but I would be going against traders with tremendous resource advantages, be it superior technology or information gathering. Why would I want to play that game? I'm reminded of the quote from Charlie Munger, the Vice Chairman of Berkshire Hathaway (NYSE:BRK.B), who once said, "I won't bet against house odds between now and the grave."

Instead, I'd rather focus on the one area where the individual investor can have an advantage over the traders at JP Morgan (NYSE:JPM), Goldman Sachs (NYSE:GS), or the hedge funds. And that's time horizon. You don't hear about the local hedge fund socking away Conoco Phillips (NYSE:COP) in the portfolio with the hopes that it will grow to something substantial in 2025. That's because if they don't perform well this year or next, they won't be around in 2025 to see their idea through to fruition. There's a reason you don't see many NFL coaches making trades to load up on first round draft picks in 2016 and 2017-because they know that if they do not perform well this year and next, they will probably not be around in 2016 and 2017 to reap the benefits of their foresight and delayed gratification. When Warren Buffett didn't participate in the market folly around the time of the dotcom boom, investing acumen alone cannot explain his resistance-he was one of the few money managers in the world who could maintain job security in the late 1990s while everyone else was seemingly getting rich with the Pets.com stocks of the world-he didn't have to worry about getting fired if Mr. Jones next door earned higher returns than him. Wall Street traders on the whole generally don't have that type of job security to wait out market irrationality.

That's why I wouldn't let the fear of high-frequency and rapid-fire traders derail me from investing in the stock market. My answer is to not engage those traders on their short-term time horizon. A tremendous advantage that we individual investors have over the institutional guys is that we don't have to fear getting fired if our Exxon (NYSE:XOM) stock doesn't do well this year or next. If we identify something that will be good over the long term, we can have the patience to wait it out. No matter how fast the high frequency traders may go, the stock market has always remained one thing: a medium of exchange to transfer the ownership of business assets. If you buy 100 shares of Coca-Cola (NYSE:KO), fifteen years from now your returns will closely resemble the business performance of Coca-Cola (assuming you paid a rational valuation). The knowledge that eventually stock prices will reflect the growth of the business I invest in makes it possible for me to reject the victim mentality of saying things like "the game is rigged" while granting me the opportunity to craft a long-term strategy that will meet my goals in spite of the background noise that typically dominates the conversation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.