How to Invest for the Long Run

Well, we’re scared, but we ain’t shakin’
Kinda bent, but we ain’t breakin’ in the long run
Ooh, I want to tell you, it’s a long run in the long run

The Eagles, The Long Run

The Eagles understood something about relationships that many investors have yet to learn about portfolio management. Success is measured in the long run.

In both romance and investing, bright beginnings inevitably turn to tougher times that test our metal. What we do in such moments as investors will significantly impact our retirement outcome and reveal if we are the type that runs for the door or hangs tough to see a better outcome.

The principled investor buys equities based in policy driven portfolio management, not inspiration. With cold-hearted accuracy, these investors know that as soon as they make their purchase, their investment is as likely to go down as up. They don’t care. They are thinking about a five, ten, twenty, even thirty-year time horizon.

The inspired investor, however, is in a sense looking for a touch of magic in their purchase. It may be the investments PE ratio, technical characteristics or even an insightful analysis from a trusted expert that makes this investment irresistible. There are countless reasons the inspired investor falls in love, but in every case, the same expectation is shared – that this new object of affection will break free of the market’s gravitational pull and float skyward towards unfettered wealth.

When such an investor finds his special equity, he can’t help but feel a smidge of infatuation with his new purchase. In this early phase of the investment cycle, the investor is dancing with Cinderella under the stars in all her glory. But even for Cinderella midnight must eventually come.

When that inevitable moment strikes and sends his darling plummeting, the inspired investor is gripped with horror as he watches his Cinderella like vision of beauty and grace turn into a soot covered house cleaner tumbling down the boulevard like a tattered pumpkin towards what appears to be an ignominious demise. At such a moment, we learn if the investor is merely a one-night stand specialist or a truly inspired prince who is in it for the long run.

Are U.S. Companies Really Worth 15% Less Than One Week Ago?

Infatuated investors are also those that suffer the greatest whipsaw effect. As the fret mongers and deep-dive analyzers abounded this week decrying the demise of American ingenuity and business, their dour chorus crushed many an investor’s inspiration, turning it to disillusionment. As quickly as these inspired souls rushed in, they now in turn rush out with similar enthusiasm.

This whipsaw effect was sadly illustrated once again in this week’s market crash. And strangely, this crash was accompanied by the pundit’s singular focus on the bad news leaving the story about corporate earnings mostly unnoticed.

It is early in the second quarter earning season with just 143 of the S&P 500 firms reporting. And the reports are promising. 75% of firms have reported earning above expectations. 13% have met expectation and a mere 13% have missed targets. Historically, only 62% beat expectations.

Furthermore, the earnings details are also quite encouraging. Average earnings for those reporting is 9.2% over last year – good but not shockingly good. Take into consideration, however, that Bank of America had to settle a lawsuit that represents a one-time, non-recurring expense, remove that singular expense from the calculations, and earnings skyrocket to a very encouraging 15.2% over last year.

More firms must still report and surely it will not all be good news. But apart from the dour media makers, reality tells us that U.S. companies are essentially earning 15% more while the public markets just decided that they are worth 15% less.

Buy, Hold and Rebalance

Buy low and sell high. It is a simple principle to understand, but much more difficult to follow, especially in times like these. We can all look back at ’08 and recall the many testimonies of those that ran for the door when the DOW was at 7,000, just to in turn stand on the sidelines, paralyzed, as the markets moved back up to 12,000. Don’t be that investor. It is easy to get out but very difficult to know when to get back in. If you miss a few critical days of market movement, you miss most of your portfolio growth. As others run for the door in fear, follow Buffett’s famous adage and be bold to buy. For the flint-jawed long term investors, now may be the perfect time to trim winners and buy losers in principle driven rebalancing act.

When all hell broke loose for Prince Charming, he knew that the slipper in his hand belonged to a woman he was not going to let go of. As an investor, do you know that your investments are worth holding onto? If in fact you own a globally diversified portfolio of low-cost index funds or ETFs, you can rest assured that today’s pumpkin will in fact transform into tomorrow’s carriage, yet once again.