Sunday, February 16, 2014

Cool Hand Luke

I'm often asked by hedge fund professionals and other extremely active traders why my turnover ratio is so low; my response is simply "self-discipline." In a market where extremely fast, and active, trading has become the norm, research, insight, and self-discipline have all taken a back seat to the "fast money." "Fast Money" however, implies several things. It suggests you have superior insight (rarely true save for illicit information), better timing (also hard to quantify), or simply experience in similar trading scenarios (this, however, I do lend credence to.)  The end result of these often rapid moves by tax law alone results in significantly higher capital gains, transaction costs, and hard to justify sudden moves.

In my opinion, well-researched positions implemented over time on a thoughtful and consistent basis are the best bets. Benjamin Franklin had a great quote about marriage, saying "keep your eyes wide open before marriage, and half open afterwards." I think the same adage can be said of long-term holdings for investors who do not style themselves as day-to-day traders. For those of you familiar with the move "Cool Hand Luke" the value of self-discipline, self-reliance, and sticking to your instincts rings true time and again; if you haven't seen this classic yet watch it. Investors who fashion themselves financial farmers who would truly like to Invest Like A Farmer there are few better examples of a character study than Luke; he is ridiculed for his principles but ultimately turns the tides in his favor. As an investor trying to reap the consistent returns found in compounded growth, dividends, and favorable tax-treatment under long-term holdings it behoves you to adopt the principles of a financial farmer.

As posted previously, the possibility of Dow 20,000 by December 31st, 2016 is good; the possibility of even further gains in select securities is even better. Given the economic climate, continued low interest rates, and implied political stability for the next ~2 years the prudent investor should still be weighted more heavily on quality, monopolistic companies with consistent dividends and well-branded products.