Simplosys Solutions Blog

Tons of people, including greats such as Warren Buffett (who actually invented the concept) recommend value investing. The idea of buying shares of companies that are fundamentally sound, but trading well below their actual long term potential. Sounds great in theory and has worked well over the years, for one simple reason - the overall market grew as well at a pretty reasonable pace. So if you simply bought the market (sau DJI index fund) and stayed with it for 10 years, from any period between 1940 and 2000, you'd make roughly 5-10% per annum, which is pretty good. So it makes sense to pick ones that will beat the market, so you'd make even more than that average, but also run the risk of making lesser. Risk, reward, I get it.

But from 1998 to today, the market's actually DOWN about 0.5%. That's like 12 years of economic development with nothing to show for it. In this market, how the heck are you going to invest in companies when fundamentals don't seem to matter? Everything goes down when China changes an economic policy or Spain declares bankruptcy or Indian real estate approaches a bubble. It's all way too interconnected. And noone, NOONE can predict what'll happen in all these places, all correctly. So it's impossible to pick stocks anymore for the long term, or so it seems, at least for ordinary investors that don't spend all day keeping track of Reuters press releases hoping to get information before everyone else, but in vain.

Long term investing is dead. Why? Because there is no such thing as long term anymore. Is long term 2 years, 3 years, 5 years? The future of the world economy is hardly something anyone foresees at this point, beyond 1 year at least. Most developed economies have debt to GDP ratios of over 50%. If your annual income was $50k and you had a 25k debt at 5%, what would you do? Borrow more, so you can go to school to learn more and make more money some day in the future? Well, most people would take up a job and pay off the $25k, or at least most of it, before getting more debt. That's because in this economy, two years from now, the job market could be even worse, so it makes sense to not run big loans and put yourself at risk of bankruptcy. But sovereign nations don't get that. They do exactly the opposite. Issue more debt, so they can build more schools and roads, as investments for the future. A future, that most people don't see as very rosy.

Take HP for instance. Even though I think the company shares are cheap today? They were cheap six months ago, the company fundamentals were and are great, but guess what, it still trades 20% lower YTD in six months. So someone that invested in HP on Jan 1, 2010, investing for the long term, how long are they expecting to wait. Most people don't know. And that uncertainty just wasn't there in the past. Which is why long term value investing is dead.

On the other hand, if you see a trend that's unbeatable, like Netflix last year, when it was adding subscribers like crazy or SanDisk, benefitting from netbooks and the flurry of electronic devices needing its memory chips, I'd jump right in, hold for anything from 4 to 20 weeks and get out. These are VERY hard to pick. And I believe this will come from angles that the media is missing (since media is so easily accessible to everyone, you will have no advantage).

Not short term. Not long term.  Then is MID TERM investing is the way to go? with names that you REALLY beleive will defy any momentum in the market? I feel inclined to think so..

Would you agree?