Long-Term vs. Short-Term Investing
SO I WENT deer hunting with my wife a few weeks ago. Or rather, she went deer hunting, and I tagged along for the experience. (I’ve fired a shotgun once or twice, but never a rifle. One of these days.)
We headed to a rancher’s field in Paradise Valley, about an hour outside Winnemucca, Nev. Winnemucca is a rural mining town — population 8,000 on a good day — with little claim to fame other than prominent mention in a Johnny Cash song. (That, and my wife was born there.)
Deer hunters get an early start. We got up at 0-dark-30, as Cassie’s dad likes to say, and hopped in the truck with plenty of hot coffee. Nothing like the rumble of a diesel on a freezing fall morning, the roads empty and the moon still bright. We were walking the rancher’s fields by 4:15.
For me, the tagalong without a rifle, the best part was hearing the coyotes greet the dawn.
Just as the morning sun begins to make its presence known — when it’s still dark, but daybreak is tickling the back of your neck — the coyotes of Paradise Valley are apt to let loose. That morning, it sounded like a dozen — or two at least. I had no idea whether they were grouped together, or just chiming in from all over. The yipping and howling had a distinctly playful sound…I imagined a throng of hippie bikers, raising their bottles in ceremonial toast.
The second best part for me was seeing the light break over the fields…then watching the moon slide behind the Sierras. With the contrast of mountains against sky, you can literally track the moon’s descent — giving a visceral sense of the Earth’s rotation and the passage of time.
OK, to the nitty-gritty. You’re probably waiting for this to go somewhere, so here goes.
One could say there are two distinct “schools” of deer hunting. We’re not talking theological schism here, but the differences are significant. As a neutral third party, I have occasionally brokered peace among dissenters on the topic.
The first school — call it the “wham-bam” approach — is all about getting in and getting out. You execute a predawn insertion, bag your alfalfa-fattened doe, and get home. It’s all about the venison. Drop and pop, minimal patience required.
The second school — call it the “experiential” approach — is much more about hunting as an experience. The hunt becomes an end in itself, an activity for its own sake. You have the same ultimate goal, but the attitude is more relaxed. There’s no feeling of urgency, and more of an emphasis on taking things in. Going home empty-handed isn’t a failure, because you take a pleasurable experience with you… and you know there will always be another day.
The wham-bam approach is all business. The experiential approach has a relaxed, contemplative component. And yet ironically, the experiential approach is the more successful over time. The wham-bammers have less patience, so they spend less time in the fields. They are constantly thinking about the warmth of the truck, so their toes get cold faster. They get annoyed if Bambi doesn’t show up on schedule, and annoyance puts a damper on focus.
The hidden value of the experiential approach and the folly of wham-bam have parallels in the way markets work. I’ll try to explain.
On a recent trip to New York, I had the opportunity to chat with a fund-of-funds manager — basically a hedge fund asset allocator — with a few hundred million under management. We discussed the ins and outs of the business; how his managers were performing; what his investors were focused on; and, of course, the latest hedgie gossip. (This was right around the time Amaranth was blowing up.)
When I asked him what his investors placed the most emphasis on, his answer was telling. Most hedge funds live or die by their month-to-month returns. “You want to get that steady 1-2% each month,” he told me. “Not too hot, not too cold…just a little each month and you’ll have it made.”
The problem is Mr. Market is no Steady Eddie. Trading and investing opportunities aren’t distributed evenly, like scoops of mashed potatoes in a cafeteria serving line. To get the real picture, the lunch lady would have to wield a range of variable scoops, from thimble-size to bucket-size. Some months, you get a little, some months you get a lot. Sometimes a great idea pans out quickly, other times you have to wait.
That reality isn’t good enough for most investors, though…they want that artificial curve. So a lot of hedge funds (not all, but a lot) go about the business of “manufacturing returns.” They try to generate those basis points however possible, no matter what it takes. This makes them consummate wham-bammers. If the doe doesn’t make an appearance pronto, they’re upset. If nothing happens for five minutes, their toes start to freeze. When you live and die by the clock, risky bets with immediate payouts start to look tempting. This short-term mentality thus leads to a lot of problems, like the overuse of leverage on “sure bets” that actually aren’t. Most hedge fund blowups have some type of “sure thing” trade involved…a hugely leveraged position with 97% odds of making a little scratch. (The problem is that other 3%, when everything goes kablooey.)
At Outstanding Investments, we are proponents of the experiential school. We take a longer-term view and try to really understand the dynamics of what we invest in. It’s not about hustling in and hustling out…it’s about developing conviction, getting a real handle on things, and being patient when required. That is one big reason OI subscribers have made incredible returns in recent years without undue risk.
Some recent recommendations highlight the patience advantage. For example, Outstanding Investments readers have reaped big gains on a company that literally turns garbage into electricity. And an amazing gold stock we just bought could easily quadruple in the next few years.
We feast on opportunities like these…but they are for the patient, not the hurried.
One last comment. Though I loathe the short-term mentality, I have nothing against short-term trading opportunities. In fact, I love ’em. I cut my teeth in the Wild West commodity markets, so trading is practically in my DNA. Outstanding Investments is about the long term — but my soon-to-be-reborn trading service, MacroTrader, will have a significant short-term component. (MacroTrader will pursue profit in all time frames, from days to weeks to months. Should be a lot of fun.)
But even here, for the short-term trader, the “experiential” school wins out over “wham-bam.” How so? Because the virtues of patience apply in all time frames. The more patient you are, the more observant you are. The more observant you are, the more you can see, hear, and understand. This puts you in a better position when a great opportunity comes along. While the wham-bammers are wasting their time trying to force it, burning up their capital on subpar plays, the smart trader is taking it all in…watching and waiting…keeping her powder dry.
November 5, 2006
Headline(s) of the week: “Mortgage Lesson No. 1: Home Is Not a Piggy Bank” ~ NY Times
“Chelsea Clinton joins New York hedge fund” ~ Reuters
Quote of the week: “If enacted, this proposal will not merely bite the hands that feed the Canadian economy, it will amputate them. Flaherty’s proposed retroactive tax reneges on longstanding agreements between investors and the Canadian tax authorities. As such, it is just as much an appropriation of capital as anything conceived by Venezuelan President, Hugo Chavez.” ~ Eric Fry, from the Rude Awakening
Chart of the week: (Courtesy of Whiskey friend Calculated Risk)
Blogpost of the week: “The Coming 2007 Recession Has Already Started in Many Sectors of the Economy…” ~ Nouriel Roubini