On Wednesday, October 24, I happened to catch two interviews on CNBC. The first, which we'll get to momentarily, was a lengthy early morning dialogue with the Oracle of Omaha, Warren Buffett. Incidentally, this discussion was held at The Ohio State University, which happens to be in the backyard of my old stomping grounds (although I can assure you that this fact had no influence whatsoever on my sentiment about the interview). The second interview that I happened to see was a quick chat with JPMorgan Private Bank CIO Richard Madigan. Although this interview was mainly focused on the upcoming "fiscal cliff," the conversation began with the question as to whether or not one could profit from the upcoming election. The complete interview can be found here, but I'll do a reasonable summation of the particular point that caught my eye:
CNBC Host: "Over the next couple of weeks and certainly right after the election, there are going to be lots of people out there saying, well, it looks like Romney may win, so you should invest in this, you should buy this, you should sell that. Well, Obama won, so you should sell that and buy this. Is that any way to invest? Is that any way to run a portfolio? Is that anything you ever do?"
Richard Madigan: "It's a great question. I'm going to distinguish between investing and trading. I'm sure there are brilliant trades around this… [but] You invest on a trend and you invest with a horizon of six months, 12 months, 18 months."
CNBC Host: "So I'm hearing if you want to trade the election, go ahead take your mad money and do that. But you and your portfolio, that's not how you do that."
Richard Madigan: "By all means."
Now I have previously raised some eyebrows by directly disagreeing with a media source on a seemingly standard line of investment knowledge. I don't particularly like to quibble, as it requires a loss of opportunistic time and effort, but in this particular case, I once again felt compelled to offer a rationalizing counterpoint. That is, Richard Madigan, allow me to distinguish between investing and trading.
First and foremost, I find it a touch humorous that the CNBC host uses the phrase "mad money" to describe essentially "gambling money," yet just four hours or so after this interview, CNBC would host a program with that precise name. But let's get to Mr. Madigan's response: "It's a great question." This alone details to me that the idea of trading and investing would be jumbled rather exactly. The question was, "Should I make decisions about a sizable amount of my net worth based solely on what inadvertently happens in a couple weeks?" It's ludicrous. The answer is an obvious and resounding: No! In fact, for it to be a great question would suggest that there is a situation whereby one might be unsure as to whether or not JPMorgan (JPM) is investing or trading.
Second, and perhaps this is just me here, but in no way did Mr. Madigan distinguish between investing and trading. Suggesting that a couple of weeks is trading, but using trends to look out into the deep future of six months or a year is investing, is again preposterous. I will submit that it might be easier to predict the market's recognition of a business' value over a year's time, rather than a week or two. However, indicating that the difference between trading and investing is a mere 24 or 50 weeks goes against everything that we know.
If I had to describe the process of investing, I would likely default to Warren Buffett's 2011 shareholder letter. But if I was forced to go at it alone, I would say something along the lines of: "Investing is a practice whereby one delays a given amount of gratification today, in the rational expectation that they will be appropriately compensated with a greater amount of real gratification in the future." For me personally, that means investing in companies like Coca-Cola (KO), Johnson & Johnson (JNJ), McDonald's (MCD), Procter & Gamble (PG), PepsiCo (PEP) or Target (TGT), and then holding these companies as long as they remain fundamental. In this instance, fundamental means retaining their already substantial economic moats and continuously demonstrating the power of said moat by means of increasing shareholder value over time. More succinctly, the ideal time for me to sell one of my wonderful partnerships is never -- although there are scenarios available that would effectively "make me sell."
But here's the good news for you and I: Richard Madigan oversees $830 billion in assets under management, and he is chiefly concerned with what happens in six, 12, and 18 months. It's poetically brilliant; it's as if those that have all of the power also have near-sightedness, but they refuse to heed the recommendation to wear corrective glasses. That is why all the big players are battling it out over short-term prospects -- something that we "do-it-yourselfers" have no interest in. What matters to us, and especially to say, someone implementing a dividend growth strategy, are the results that our partnerships happen to have in say six, 12, or 18 years. In fact, I was just using the six, 12, and 18 marks as a parallel to Mr. Madigan's comments. In reality, I would have no qualms about holding onto my partnerships for 40-plus years to forever, as long as they continue to stay fundamental.
What's great about this scenario is the opportunity that it affords the individual investor. I'll give you a perfectly good example: This past January, I wrote an article entitled, "Why Investor's Shouldn't Care about the Coca-Cola and PepsiCo Downgrades." Within this article, I detailed that both Coca-Cola and PepsiCo had recently been downgraded due to currency exchange concerns, among other things. Now in the short term, this is likely to be a perfectly rational fear. I have great faith in the analysts' understanding of the inputs to the businesses they follow in the short term. Both Coke and PepsiCo would likely make less money in the short term. Now, if you're only "investing" for say six months or a year, then this would be a very real concern for you. And we saw this in the market: Coke slid 1.85% on the news, and PepsiCo dropped nearly 1% against a flat market. Incidentally, if you had bought then, you would be up around 10% on both companies right now, but that's not the point. The point is that as long as the businesses remain fundamental, that is, they are still going to sell more beverages in the future and command a premium for doing so, then there's no reason to worry in the short term. As an investor, your chief concern is a strong business over the next say, 10 to 50 years. Thus the short-term follies of the big market players are a perfect opportunity for the long-term individual investor.
I would like to indicate that in general, I would advocate staying humble in one's observations. But as you can plainly see, I did not necessarily stay mindful of this advice. Perhaps I've been a touch too harsh on Mr. Madigan, but in reality, I simply can't nod along with considering six months to be investing on any level.
Now, if I haven't yet convinced you of this long-term opportunity (perchance I never could), I'll finish with an excerpt from the Warren Buffett interview that I had originally promised to, hopefully, add some clarity:
Warren Buffett: "I say hold. The idea [of] the European slowdown or this and that or anything like that would not cause you to go out and sell. If you own a good farm run by a good tenant, you wouldn't sell because someone says this news item is happening in Greece. If you owned an apartment house and you get to raise your rates, you wouldn't dream of selling it. If you had a good business [if you had a McDonald's franchise], you wouldn't think of buying or selling every day. When you own stocks, you own pieces of businesses. They're wonderful businesses. You can pick the best businesses in the world. To buy or sell on current news is just crazy. You're in a wonderful business. You have people running it for you. You know you're going to do well over five or 10 years. To think news events should cause you to try to dance in and out of something that's a wonderful game, it's a terrible mistake. Get into a bunch of wonderful businesses and stay with them."