It seems whenever the markets go through rough patches I need to spend an inordinate amount of time "deprogramming" people from some of the bad influences of the news media. I don’t mean to indict all news media, far from it. We all get very useful information everyday through the media but unfortunately it frequently carries with it subliminal messages that undermine our best efforts to be good investors.

CNBC is a great example. It’s a wonderful source of timely business information but it has a very definite "day trader" approach to most of its reporting. To the uninitiated, watching CNBC you’d believe that most professional investors spend their entire day turning over their portfolios multiple times with every piece of news that is released. The fact of the matter is that the majority of daily trading done by professionals is driven by the need to address cash flows or implement subtle shifts in the portfolio, not to react to the latest bit of news. With the exception of some hedge funds, the best portfolio managers are investors not speculators. This is a key point that frequently is undermined by the business media’s focus on minute to minute trading. Yet for many individuals, the day trading mentality is taking root. A recent article in the Wall Street Journal*, highlighted a study that determined the average holding period of a stock listed on the NYSE and AMEX is now only 6-7 months. That’s a remarkable statistic. The stock holding period today is less than half the average period in 1999 and as short as it has been since the stock market crash in 1929! If nothing else it looks like some people need to be reminded of the tax code as it relates to long term capital gains. Obviously some short term traders manage to make money, even after taxes, but most will at best create only mediocre returns, and fully taxable returns at that.

The blame for this bourgeoning short term mentality can be cast in many directions but fundamentality the tendency to doubt one’s decisions is simple human nature. I school my clients from day one about the importance of being a long term investor as opposed to a speculator but whenever we see the markets hit a rough patch like we have seen recently I find it necessary to circle back to remind some of them of our long term approach. It’s easy to get caught up in the frenzy that can surround fast moving markets as you watch others "getting out of the market" as it falls. The power of these images is so strong that I have to admit when the market is freefalling and I watch CNBC to try to get a better picture of what is going on, I have to sometimes remind myself that I’m a long term investor and not to overreact. Those of us who have been around for a while know that knee jerk reactions to sudden moves in the market seldom end well. The images presented by CNBC represent the world of speculators, not good investors. If you are invested in a broadly diverse portfolio with fundamentally good companies underlying your investments, the best reaction in tough markets is almost always to have no reaction. Sometimes it’s best to just turn off your TV and ignore the business media altogether. I’ll bet one of the most successful investors of all time, Warren Buffet, turns his set off, if he even has it on in the first place. As investors, we need to do the same.

Randy Gridley

March, 2007

* The Wall Street Journal, February 26, 2007