There is this debate among investors, journalists, and academics about whether we should invest for the long-term or focus on short-term results. Indeed, many studies show that the "buy-and-hold" strategy outperforms most others. So why do so few people actually follow it? Why is Wall Street so obsessed with the short-term?
This past year, I was involved in serious discussions with a sizable mutual fund company. They were looking at me first to be an analyst, and then the discussions moved to a fund manager position. Everyone involved acknowledged that I could make significant contributions and that my performance record was excellent (at least as far as it could be measured), and there seemed to be a lot of respect for my approach. But there was one stumbling block - my focus on the long-term and the fact that I did not want to be measured on short-term results. For various reasons, they wanted somebody who could deliver results over the next few quarters.
This is emblematic of the way Wall Street works. I don't fault the fund company - most investors won't buy a mutual fund if the short-term results aren't good, regardless of the long-term record. Since purchases generate commissions, and commission revenue is a major source of income for the company, a short-term focus seems to be a business necessity for them.
Warren Buffett probably would not have made it working for a mutual fund company.
So, maybe I should focus on the short-term - everyone else is doing it.
Did I mention that this fund company's value team has had poor results - both in the short-term and the long-term? These are very smart people with enormous resources at their disposal, yet they have been unable to accomplish their goals.
I will stick to my guns. The Graham and Dodd/Warren Buffett/intrinsic value investment philosophy can generate outstanding long-term performance. However, what you gain in the long term, you will sometimes give up in the short term. The reasons are multiple, but importantly, a portfolio pursuing this investment philosophy will not track the markets very closely, and, if concentrated, is likely to be volatile over the short-term.
In my experience, even investors who can outperform over the short-term often give up long-term value. Again the reasons are multiple, but usually it is because pursuing short-term performance means that the investor must turn a blind eye to long-term risks and ignore value.
Most importantly, however, because so many resources on Wall Street and elsewhere are devoted to short time horizons and so few to the long term, I have a lot less competition. And less competition means a higher probability of success. There are a lot of very smart people frenetically working to deliver quarterly and even monthly results - and it works out to be a bit like chasing one's tail.
I, of course, cannot guarantee short- or long-term performance. With stocks, there are no guarantees. I might screw up - but instead of a short-term screw-up I'll be a long-term screw up.
However, I would rather chase outstanding long-term results that are achievable and more probable than modestly good short-term numbers that may not be possible anyway.
In addition, a long-term focus makes much more sense. Businesses that manage for the long term usually create more value than businesses that manage only for the short-term. Why should investing be any different?