Quentin D. Solano
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Quentin D. Solano in Breaking news,

How Greece can make us better investors

A key lesson learned from 35 years of tracking advisers’ returns: Long-term investors win in the long run


(MarketWatch) — Here’s a provocative thought for those of you obsessed by Greece’s debt crisis: Wait a few years and you will have completely forgotten about it, and you will instead be losing sleep over some other crisis du jour.

That unsettling prospect becomes even more provocative when coupled with another: It’s easier to predict where the stock market will be several decades from now (significantly higher than today!) than its direction in the next trading session (a total toss-up).

Those thoughts point to perhaps the most important investment lesson I draw from my several decades of auditing the performance of the investment-advisory industry: Your focus should be almost exclusively on the long term.

My Hulbert Financial Digest (HFD) began monitoring advisers on June 30, 1980, so I now have precisely 35 years of objectively measured track records with which to illustrate the greater predictive power of the long term. Consider a hypothetical investor 15 years ago, in mid-2000, who was using the HFD’s rankings that were then available to choose an adviser to follow for the next 15 years. Until today, in other words.

It’s worth noting that he wouldn’t have been worrying about Greece, since he would instead have been obsessed with that hissing sound that came from the fast-deflating Internet bubble.

It turns out that this hypothetical investor would have performed dismally since mid-2000 if he had chosen an adviser based on short-term performance. But he would have beaten the market if he had picked those at the top of the rankings over the previous 20 years. (That was the longest period of time then available in the HFD rankings.)

For example, the top-performing adviser over the 12 months through mid-2000 proceeded to lag a buy-and-hold over the next 15 years by 4.8 percentage points per year on an annualized basis. In contrast, the top performer over the 20 years prior to mid-2000 has, since then, beaten a buy-and-hold by 6.4 percentage points a year.

So by doing nothing more complex than shifting his focus from the short term to the long term, this hypothetical investor would have gone from lagging the market by a large margin to beating it by an even larger margin.

To be sure, this illustration contains only two data points. But the pattern holds over larger samples as well. The chart at the top of this column reflects the top five performers over various periods through mid-2000. Notice that this fivesome’s average performance over the 2000-2015 period increases along with the time period over which past performance was measured.

Unfortunately, our technology-crazed world seduces investors into just the opposite kind of behavior than what I am suggesting here. A number of psychological studies have shown that investors engage in increasingly destructive short-term behavior the more frequently they re-examine their holdings and calculate their portfolios’ net worth. And, yet, because of the Internet and social media, our attention is constantly being diverted away from this longer term that matters.

Turning to a different Greek drama for an analogy, this one several thousand years old, those diversions remind me of the Sirens whose singing was so alluring that Ulysses knew he would be unable to resist. And yet he also knew that succumbing to that temptation would be fatal. So he had his men tie himself to the mast of the ship on which he was sailing so he could listen to the Sirens’ songs and still be able to resist.

We need to figure out the investment equivalent of what Ulysses did.