The Long-Term Buy and Hold To Fair Value Investor

"Imagine a world where the stock market is open for trading only one hour of every year." 

This quote from Mark Spitznagel's Wall Street Journal article "Investment Strategy:  All About the Benjamins" either elicits feelings of panic or insouciance from holders of financial assets.  Panic from those who base their investment strategy solely on a constant stream of prices: traders.  Insouciance from those who base their investment strategy on a claim to a long-term stream of cash flows that will be received in the future: investors.  Neither method is superior in and of itself.  However, it is rare to find an individual that is capable and knowledgeable in both.  This blog will be focused primarily on long-term investing and the arguably dead art of "buy and hold to fair value investing."

The long-term investor is typically unfashionable, stubborn, skeptical, uninterested in what others think of his opinions, obsessed with the wonders of compounding, and prone to arguing that dividends still matter.  James Montier, of GMO, LLC, refers to him as "A Man from a Different Time."  The average holding period for a NYSE listed stock has decline from roughly 5-6 years in the 1970's to1 year today [See Exhibit 2 from "A Man from a Different Time].  As James shows, the return for holding stock one year is primarily based on changes in valuation where as the return for holding a stock for five years is primarily based on dividend yield and dividend growth.  Yet at the end of the day, the long-term investor is just like everyone else; he wants to buy something today that will be worth more in the future.

There is a universal difficulty in becoming a successful long-term investor for the vast majority of people.  That is lack of time.  Most people spend their days toiling away at occupations far removed from investment management.  Free time is usually (hopefully) not spent pouring through financial statements and investment commentary.  This leaves two options.  Hire a financial advisor or do-it-yourself.  Either way, it makes sense to spend time learning about investing.  It might even help prevent your favorite financial advisor from selling you a discounted AAA mortgage backed security on an ocean front property in Arizona.

Another common difficulty is whether one is even capable of valuing a company, assessing the safety of a stream of interest payments from a bond, valuing puts and calls, or knowing when or if hoarding commodities makes sense.  If you are like me, you may have a slight inkling of how to go about it, but that's as far as you wish to take it (or can take it).  If that is the case, then intelligently investing in individual stocks, bonds, currencies, derivatives, and commodities may not be doable.  This blog will focus primarily on mutual funds and exchange-traded funds (ETF), although creating "copycat" portfolios and investing in individual bonds will be covered.

At the heart of the matter is getting the valuation work correct.  Investing money in financial assets that are priced to provide, with a reasonable probability, the return you are hoping for over a given period of time and avoiding assets that are overvalued will in time provide reasonable returns to the long-term buy and hold to fair value investor.  What the market is saying on a day-to-day basis will be nothing but background noise.