The Death of Long-Term Investing


There's no denying that the deluge of information on every subject has changed the way we live. The influx of information, propelled by innovative technology, has created an almost unquenchable thirst for more instant knowledge. In the world of investing, the craze for fast, if not advance, information has uprooted almost every rule of patient investing.

The new rule seems to be: "Don't bother about long-term results. Taking advantage of the short-term swings will take care of the long-term results." Consequently, everyone seems to have turned into a short-term trader masquerading as an investor—or worse, as an investor committed to the long haul.

Note how everybody intently watches companies' quarterly earnings performance. Every slight wiggle is given so much undue importance: A one-cent shortfall from the analysts' consensus expectations is enough to crater the best-grounded stock. Companies that fail to meet forecasts are punished mercilessly. Investors are, more than ever, trigger-happy. They sell almost instantaneously when earnings fall below expectations.

"Day traders" aren't the only ones who engage in this; institutional investors who are supposed to be in investments for the long term are as guilty of pouncing on short-term earnings news. The result: a lot of volatility in the stocks of companies during the earnings reporting season.

A MODEL LONG-TERM INVESTOR. The large institutional investors—managers of large amounts of money from pension and mutual funds, financial companies, and the like—pay a lot of money for Wall Street research, supposedly to establish long-term gains. Yet they jump as quickly, and as nervously, as the day traders when it comes to short-run developments, such as monthly sales or quarterly changes that may not really affect a company's long-term operations or earnings growth.

Fortunately, there are still authentic long-term investors who manage money with extended objectives—whose strategies are based on goals that are five or more years out. What this entails is not just patience but astute analysis of companies and the tenacity to hold on when storms hit.

Michael Schwarztman, president of ValueSearch Capital Management, in Swampscott, Mass., is one investor who won't be rushed into selling a stock to make a fast profit or a quick exit. Once a stock meets his requirements, he sticks with it for at least four years, confident that his expectations will be validated by then. So far, the long-term formula has worked.

ValueSearch started 18 years ago, and since then the leveraged fund it manages has posted a compounded annual gain of 18.2%, vs. Standard & Poor's 10.8%. Schwartzman's value-oriented portfolio has only 20 stocks, which he figures represent the best-run public companies, mainly in the U.S., that to his calculations are still undervalued, based on their growth potential.

STICKING WITH EBAY. One of the mainstays in his portfolio is eBay (EBAY), the world's largest person-to-person online trading community, and one of the most popular e-commerce destinations. Buyers and sellers are brought together in an auction format to buy and sell a wide array of items—everything from coins to cars—over the Internet.

EBay has been controversial of late because most analysts have gotten nervous about its slowing growth rate. Schwartzman first purchased the stock when it was trading at $10 a share in 2001. The stock hit a high of $60 in 2004, but it is now trading at about $26, as more analysts turned negative on the stock. EBay has been on Wall Street's disfavored list because its growth has slowed from a rate of 50% to 24% now. Recent earnings results have eased because it has changed its accounting method to reflect the cost of stock options.

Meanwhile, ValueSearch has stayed with the stock, still optimistic about eBay's business and its growth potential. Schwartzman laments that investors have overreacted to the slip in earnings. "One fact that investors should remember is that a growth rate of 24% is still enviable and worth appreciating, especially in such a large enterprise like eBay," he says. Schwartzman thinks the stock is on its way to $72—albeit in four years.

HIDDEN GEM? Investors are worried over short-term factors that won't affect eBay's long-term growth. "It's a classic overreaction, and that is where the opportunity lies, in buying the stock at its current low levels," he says. Also a concern to some analysts is the competition that they see in the business. Lehman Bros., which rates eBay "equal weight," or neutral, notes that eBay is "fighting the natural evolution of e-commerce as it shifts toward multichannel selling."

But a bull on eBay, Scott Kessler of Standard — Poor's, who rates the stock a "strong buy," looks at it quite differently. "We are optimistic about eBay's emerging growth vehicles, including its international and payment segments." He regards eBay as "the clear leader in online auction," a "mainstream Internet retail destination," and a major facilitator of large transactions involving cars and real estate. Kessler has a 12-month price target of $48.

Another long-term investment that ValueSearch holds in its portfolio is Mine Safety Appliance (MSA), which develops and makes safety products for workers, such as respiratory protective equipment and gas masks. ValueSearch got into the stock when it was trading at $9 three years ago. It has since climbed to $40, but Schwartzman hasn't sold any shares because he thinks the company, which has almost no following on Wall Street, remains undervalued. The company is growing fast, he notes, and he sees it hitting $69 a share in four years.

PATIENT FOR THE PAYOFF. Schwartzman maintains that the instant-information world we live in is great—if we use it with prudence and patience. To do this, "we make precise calculations of intrinsic values, purchase prices, and selling prices" for the companies chosen for the portfolio, he says. "We rely on the concept of margin of safety," he adds, to make sure that the stocks achieve the desired targets. Doing that, says Schwartzman, gives him confidence in hitting price targets for at least a period of four to six years.

"We have developed a proprietary investment model," he says, that forces "strict numerical representation of our investment parameters, as well as parameters that describe the future characteristics of a company." That controls and minimizes, he adds, "our own judgmental biases" about a stock and eliminates a lot of risk in the investment process.

Indeed, the short cut to quick gains may well be fraught with real risks. And in investing, there may be great rewards from the old adage that patience is a virtue.


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