Get in the market and stay in the market. Don't worry about the sentiment of the crowd or short-term crises that make others panic. If you invest in good companies, you'll do well in the long run.
The tenets of long-term investing would seem to be getting harder to stand by these days. Whether it's the dot-com implosion, the financial crisis, runaway sovereign debt or an earthquake/tsunami that could send the world's third-biggest economy into a tailspin, the basic philosophy underlying traditional long-term investing has been challenged like never before.
“I still believe fundamentals are important, but buy-and-hold investing is dead,” said Ron Carson, chief executive of Carson Wealth Management Group, which manages $3 billion.
Actually, it's very much alive at some of the oldest mutual funds in the country. The Pioneer Fund, for example, is the third-oldest mutual fund in the U.S. and a testament to the power of long-term investing. Last year, the fund surpassed a cumulative total return of 1,000,000% since its inception in 1928. A $1,000 investment in the fund that year would have been worth over $10 million last year. That equates to an average annual return of 11.81% after expenses, versus 9.55% for the S&P 500 index.
John Carey, who has managed the Pioneer Fund since 1986, said his investing philosophy remains largely consistent with that of the fund's first manager, the legendary Philip Carret.
“We don't shoot the lights out with [initial public offerings] and the latest fads,” he said. “We focus on well-established, sound companies that have traded through two or three business cycles.”
The trademarks of long-term investing include an emphasis on fundamental analysis of companies and their outlook rather than technical indicators or market sentiment. Low turnover of stocks and a commitment to valuation criteria are also important.
The discipline of the investing model is as relevant today as it has ever been, said Kevin Beatty, co-manager of the Massachusetts Investors Trust Fund. “Long-term investing is alive and well,” he said. “Our philosophy is to employ good valuation discipline in looking for high-quality companies that will perform over time.”
Mr. Beatty's fund, like the Pioneer Fund, is a stalwart in the mutual fund world. Founded in 1924, it too has remained committed to a long-term investing strategy that emphasizes fundamental analysis and discipline through periods of volatility. Since inception, the fund has gained an average of 8.91% annually.
Mr. Beatty admitted that his patience was tested in the darkest hours of the 2008 financial crisis. “When good stocks were going down 2%, 3% — sometimes 10% — in a day, it did feel like the game had changed,” he said. “But we stuck with our philosophy and it held up well.”
For both portfolio managers, patience through volatile markets has served them well. The Pioneer Fund's assets increased 50% in the last two years to $6.9 billion, while MIT's were up 32% to $3.3 billion in that period. Both have investors who have stayed with the funds, for decades in some cases. As tempting as it may be to react to recent events in the Middle East and now in Japan, both Mr. Beatty and Mr. Carey remain committed to their investing model.
“We trade even less in volatile markets,” said Mr. Carey. Turnover in the Pioneer Fund portfolio between 2005 and 2009 averaged 11%, significantly lower than the fund's historical 15% average. “The market was trading on macroeconomic events, not on fundamentals. So we took a wait-and-see approach.” He did get burned with some exposure to regional banks, but he said he got out of the sector as their problems became clearer.
Likewise, Mr. Beatty has resisted the temptation to try to negotiate the swings in market sentiment. “People are kidding themselves if they think they can make quick asset allocation decisions,” he said.” Market timing is very difficult.”
The old-school, fundamental investing style of these two fund managers may seem out of step in a world regularly rocked by crises that cause volatile swings in asset prices. But for many in-vestors, their investing model is all the more attractive these days.
“Buy-and-hold investing is not dead, especially when it comes to core positions like we have with the Pioneer Fund,” said Michael Ward, president of Wealth Management Partners LLC.
Mr. Ward has acquired several small advisory practices over the last several years, many with older, retired clients.
One woman, who invested $5,000 in the Pioneer Fund in 1958, was sitting on a position worth $460,000, accounting for over 50% of her portfolio. “I reallocated some of it, but I still hold the fund as a core position for her,” he said.
The current volatility in stock prices in response to the Japanese earthquake might seem like another good reason to bail out of the market. But Mr. Carey is going to keep his eye on the long term.
“You have to wait through the downdrafts because you can't tell when the market will turn around,” he said. “Bull markets often occur in short periods and you can have a devil of a time catching up.”
E-mail Andrew Osterland at [email protected].
