Peter L. Bernstein. Long-term investing - the theory or just bullshit

Peter L. Bernstein. Long-term investing - the theory or just bullshit?

Peter Bernstein has written not only bestsellers, but also made millions of dollars for its clients as a consultant on investment. He has also taught at colleges and universities, has created his own consulting firm, Peter L. Bernstein "(Peter L. Bernstein, Ips.), And founded the journal" Journal of Portfolio Management "(Journat of Portfolio Management) in 1974. Combining real investment world and the world of science, Bernsteinhas created a synergy. "magazine supported my youth more than anything else - he said - because the process of learning it was so intense. When you need to read all this stuff - to read, instead of viewing, both bad and good - you inevitably learn it. "His education began in New York, where he had gone to private school, graduating from it in 1936. His next steps - Harvard and the Air Force during World War II.

When his father, who in 1934 co-founder of "BernstaynMakoli" (Bernstein-Macaulay), to advise on investment and family-oriented investors, in 1951, died unexpectedly, Bernstein began working in the company. In fact, he made a total of $ 7.500 Bernstein recalls that when they were all very conservative, because they still remembered the stock market crash of 1929. In those early days, even the Bernstein advised clients to stick to blue chips "and bonds. "Our biggest gamble - he told - was an early identification of the boom of puberty and the acquisition of large positions in the" Gillette "(Cillette) and" Tampax "(Tamrah) for the last while in polite conversation was allowed to mention only in passing." Only in the 60 bastards, when "those old people started to die," he said a change in the willingness to take more risk.

When in 1971 his wife died, and the United States was on the move protested against the Vietnam War and speaking for social revolution, Bernstein decided that for him it's time to make some changes. In 1973 he founded his own consulting firm. Her clients are mainly institutional investors. Another change in the investment world, which he was a witness, was the disappearance of a balanced money managers. "A stylish coffee shop specialized managers, we are witnessing today, leads to mixing of the risks and inconsistencies that most clients are not able to understand" - he said. Risk and volatility - two topics he addresses in his paper "Is the theory of long-term investment or simply nonsense dog?"



What we mean by "long-term investment?" The aim of this work demonstrate that "long term" no more than a product of imagination.

For investors who think the quarterly measurements, the year might seem a very long, and five years, almost beyond perception. For supporters of dividend discount model (Dividend Discount model) long located at the infinite future. Most of us are located somewhere between these two extremes. And yet each of us will determine the long term, referring to a different time period. This means that your definition may coincide with my only chance. But regardless of how we understand it, a long time is more than zazhmurivanie eye in the hope that some great tidal wave will bring your home court in intact, loaded to the same items as time required at the moment .

I'm going to approach this problem from two different points of view. First, we examine whether there is really such a spider as a "long term". Secondly, based on the fact that it is possible to identify and determine the long term, I will try to demonstrate that the transition from short-term to long term investment process converts much deeper than most people realize.


HOW LONG long CPOK?
When people talk about the long term, thus they are told that they can distinguish signal from noise. And yet the world - awfully noisy place. The distinction between the main force and endless swarms of peripheral events - one of the most difficult tasks that people should decide and on which they can never escape.

Do the two unusually warm winters in a row beginning of global warming, or they are in fact a normal variation, which will be followed harsh winters? When a baseball team champion loses three games in a row, does this mean the beginning of the end of their dominance in the league or short break in the string of their victories? When the stock market falls by 10 percent, does this mean the beginning of a new bear market or just a correction of the ongoing bull market? October 1987 - the beginning of the end or the end of the beginning?

Long-term investors who believe that they can separate the signal from the noise, despised traders, so absorbed by the pursuit of waves and ripples that risk missing the main trend. The slogan of the true long-term investor - retreat to the average values. "In the long run, all balanced by, the main trends can be identified, the main trends dominate. This concept dominates a large part of active investment management. The very idea of" undervaluation "or" reassessment "means some identifiable norm return to a market price. Other investors may choose to give fads, whims and rumors, but persistent investors ultimately will prevail.

Is this true? The lessons of history say: rules are not always normal. All examples refute blind faith in the retreat to the average values. This is exactly the problem that now beats Alan Greenspan: Is finally landed a long and trusted relationship between M2 and nominal GNP, or the current distortion is just an anomaly? Here's another example: for 170 years in the United States long-term bonds of higher quality on average, had a yield of 4.2 percent with a standard deviation along a percent. In 1970, the rate of return broke the old upper limits of vibration and started to move to 7 percent. Investors looking in bewilderment: how to decide whether this is a flash or a new beginning? There was another moment in the late 50's, when the dividend yield stocks slid lower bond yields. Once again, investors at that time had no appropriate rules to interpret. 'Whether it was completely unexpected event a fundamental change in market structure or only a temporary aberration that will soon be corrected, and "normal" yield spread between stocks and bonds will be restored.

John Maynard Keynes, who knew something about investing, and the probability of the economy, was skeptical of the idea that you can see through the noise signal. In his famous statement, he declared:

Long prospect of misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in the season of storms, they can only tell us that when the storm passes, the ocean calms down.

Keynes argues that the season of storms - the norm. The ocean will never settle down fairly quickly, so it mattered. On the philosophy of Keynes, balance, and average values ??are myths, not the foundations on which we build our buildings. We can not escape the short term.

These considerations explain why I stated at the outset that "long term" no more than a product of imagination. The way you perceive the long term, and how you define it, ultimately, the question of internal attitude. This question is answered rather the nature of your basic philosophy of life or even how you feel when you get up every morning, than a strict intellectual analysis.

Those who believe in the constancy of the seasons storms, the look on life as a sequence of short periods in which the noise dominates the signal, and the lack of basic parameters makes the rate is too elusive a concept that was worth worrying about it. These people - the pessimists do not see in the future is nothing but clouds of uncertainty. They make decisions based only on a short distance ahead, they can see.

Those who live by the rule of retreat to the mean spending their time quite differently. They expect the storm will pass and one day the ocean calms down, From egogo, they may decide to ride out the storm. They - the optimists, who see the signals that guided their ships they send to the happy day when the sun will shine again.

My own understanding of the issue - a mixture of these two approaches. Hard experience has taught me that the pursuit of noise too often leads to what I'm missing the main trend. At the same time, surviving the shift, the yields of bonds / shares of the late 50's and the break in bond yield in the stratosphere over 6 percent in the late 60s - to mention only two such devastating events of many - I look with suspicion on all of these the main trends and all these averages, which are supposed to return variables. For me, the main objective of investing in checking and then double-checking of parameters and paradigms that seem to govern daily events. When they look solid, bet against them is dangerous, but the most dangerous step of all - taking them without a proper question.


EFFECTS OF LONG-TERM OUTLOOK FOR INVESTMENT MANAGEMENT
Obviously, the long-term investing is different from the short-term trading. But I would argue that time - a critically important variable in the investment process, the difference between short-and long-term investment is much deeper than most people realize. The long-term game is so not like a short game that you play it, you'll need a whole new set of rules. Let me mention three areas to which this requirement applies.

1. Volatility

The first difference is the impact of volatility. Volatility - this is noise. Short-term trader puts on a sound, long-term investor listens to the signal, but long-term investor, thinking that the main trend of the time sniveliruet volatility, expected a shock. Volatility - the subject of major concern to all investors, but it is more important in the long than the short term.

Volatility is important. It defines the uncertainty of the price at which assets will be liquidated. These "Ibbotson Associates" (Ibbotson Associates) tell us that the expected total return S & P 500 in a one-year holding period is approximately 12.5 per cent, but you should not be surprised if it turns out somewhere between -8 and 32 percent, which means spread of 400 basis points. For individual stocks the range is much wider. Therefore, the volatility seems to have great value if you intend to keep the asset only one year.

Stretch your holding period of one to ten years, and the range of expected returns narrows from five to 15 percent per annum, and its spread is only 100 basis points, implying a very small chance of loss during the period of ten years. Although the volatility now seems much less troublesome than it was in a one-year basis, and chances to be at a loss at the time of liquidation is now significantly reduced, do not let yourself be lulled by this relatively narrow range of annual rates of return. What is important is not the annual rate of return, and the ultimate resale value after ten years. Dollar invested for ten years at 5 percent per annum, is converted into 1.63 dollars, with a rate of 15 percent of it is converted into 4.05 to $ Because the dollar invested for a period of one year is likely to turn later in the year to something between U.S. $ 0.92 and 1 $ 28, the spread of liquidation value for one year is much narrower than the likely outcome for the ten-year holding period, despite the greater the standard deviation of return. So where there is more uncertainty - in the short or long term? What can I say about the quiet ocean! He may indeed be very calm.

2. Liquidity

When you buy something to make a few points, or even ten or twenty quarters osmushki and acquire meaning, for sale at a favorable rate is important. When you buy to keep for a long time, for several years, even several paragraphs in the price will not matter much. Liquidity - a concern for short-term investor and a secondary issue for long-term investor.

The essence here is obvious, but it paid too little attention. How important is the price for the assets that are not going to eliminate? If you mnogomilliardodollarovaya investment management organization, which has no other choice but to buy and hold stocks indefinitely, "Exxon", IBM and other big companies with large capitalization, what difference to you, as prices fluctuate daily? Why bother keeping track of their daily behavior? Everywhere in our financial system is far more assets allocated to the market than is necessary, creating serious distortions about the reliability of the institutions involved. Assets acquired for long term storage, it is not the same thing that the assets to be liquidated within a few weeks or months.

3. Income

Return on investment - a critical link between short-and long-term investment. Income is also a vivid illustration of the important principle of the Hegelian dialectic: changes in the amount ultimately leads to a change in quality.

For short-term trader stock dividend - a criterion for evaluation, but the actual cash income from dividends is irrelevant. Trader profit will depend on changes in prices, because prices tend to move in ranges, far exceeds the return in one year. Now extend the time horizon. Over time, the payment of the income pile up, changing the character of the structure of income. Investors that can reinvest earnings, are now beginning to acquire the desire, the opposite will short-term traders: traders want to see the prices went up, so they can sell, while investors who reinvest their earnings, are buyers and should want to ensure that prices fell, while the process purchase.

In the case of bonds, this story is obvious. Current coupons in the form in which they have, charge interest and interest on the interest and will soon begin to outweigh the importance of price changes and, for bonds with longer maturity, comprise the overwhelming share of total income.

In the stock market story has a similar character, but few people notice it. If you put a dollar in the stock market in late 1925 and just allowed him to rise in price, spending all the income you received during those 66 years, today you would have $ 30 If you had ignored the increase in the cost and just would accumulate dividends for sixty-five years without any income from the reinvestment, you would have an amount equal to $ 20 Not bad. In fact, given that the period began in 1925, and he intervened in the stock market crash in 1929 - 1932., Your growing pile of money would exceed the market value of your portfolio in a period of thirty-five years from 1930 to about 1965.; Dividends significantly behind to the value of the portfolio until 1982 - fifty-six years later, your initial purchase.

Let us return momentarily to the end of 1925, to give you a complete picture of what I'm talking about. According to the "Ibbotson Associates," a dollar invested in the stock market at the end of 1925, reinvested all dividends and tax-free payment and brokerage services, today would have grown to about $ 600, much higher than $ 30 from the mere increase in the cost. The difference in the $ 570 exemption is obtained from and reinvestment of the income itself, blowing up to the magnificent sum of $ 600 per investor, was released to the market at the top in 1929, would have to wait until 1953 before the stock price reached a level of return. However, if you reinvest earnings breakeven would set in 1944, nine years faster.

Consequently, the role of price in determining the total income steadily losing value as we move from short to long-term investment. The average annual rate of return with! 925 years was 4.7 per cent per annum with a standard deviation of only 1.2 percentage points. Annual income from appreciation in value was an average of 7.1 percent, but with a standard deviation of twenty percentage points. These facts explain why the tortoise wins the yield in a race against the hare raising costs, but they also help to explain why the standard deviation of income tends to shrink over time.