Permanent Value

Week in Review 9/10/13

Bruce Doole
September 10th, 2013

Invest with a 5-year plan

The glitch that shut down the Nasdaq ($COMPX +1.01%) for a few hours on August 22 apparently made a few investors think about shutting down their trading and investing activity.

Warren Buffett has said that he buys investments “on the assumption that they could close the market the next day and not reopen it for five years.”

“So,” wrote Bill R., a 30-something investor in Weymouth, Mass., whose note spoke for a number of other readers of a similar mind, “how would someone invest if they thought the market was going to be shut down for the next five or 10 years? I think that would be a great way to invest and not worry about the market every day, but would it be different from what I do now?”

That’s an interesting question, because modern technology has made it so easy for investors to connect with the market that being disconnected almost certainly would take some strategies off the table.

It’s doubly interesting when combined with another of Buffett’s adages, and then with his trading record.

Buffett has famously said that his favorite holding period is forever, but for all of the posturing, his average holding period is judged by most observers to be somewhere in the four- to four-and-a-half years range.

The disconnect between what Buffett says and what he does is not egregious; his favorite holding period may be “a lifetime,” but not every investment lives up to favorite status. (In fact, that statement would apply to my own investment philosophy and portfolio.)

Investors who want to “set it and forget it” — building a portfolio as a shutdown is coming — might want to start by eliminating investments before picking what works.

“That long-term time frame means you have to find things that you are confident will be up in five years, but you have the benefit of not watching them be volatile on the way,” said Charles Mizrahi, editor of Hidden Values Alert.

That means you can get rid of most of the hedge-fund, absolute-return and market-neutral strategies in mutual funds, toss out the leveraged exchange-traded funds and most of the attempts to turn “alternative investments” into products for mainstream investors. Those efforts — when successful — often try to thrive on volatility that is irrelevant if trading isn’t allowed.

The time constraint on trading doesn’t hurt the logic behind indexing either; if you believe the market will be up in five or 10 years, having an index fund ensures you’ll participate in that long-term move.

You could also get rid of trendy stocks, companies with quick-changing technologies or in businesses that could become obsolete in favor of clear industry leaders and solid-if-unspectacular companies in industries that aren’t going anywhere, the kind that pass a screen of “What can I buy today that I would not worry about for five years?”

You’d spread your money around and diversify, because knowing that you are locked into the portfolio for five years would mean that you would not want any one mistake to blow you up while it festers during your lock-up period. You’d make sure your bond holdings were spread around to guard against what will happen when rates rise further.
By Chuck Jaffee, MarketWatch