MINNEAPOLIS, MN--(Marketwired - Aug 29, 2013) - You need to set aside the bifocals and replace them with binoculars if you want to give yourself the best possible chance for superior long-term growth in the stock market, claims author Frederick K. Martin of Disciplined Growth Investors.
Investors' short-sighted fixation on the stock market may be misguided, says Martin, but it's perfectly understandable given the influence the big firms on Wall Street wield over the mindset of main stream investors. Brokerage firms are in business to generate transactions and they put considerable marketing muscle into fostering a short-term mentality among the investing public.
In his book, "Benjamin Graham and the Power of Growth Stocks" (McGraw-Hill), Martin makes the case that rather than micro-analyzing a company's current and near-term developments, an investor can get a much better perspective on a stock's prospects by focusing on long-term trends.
Not only have Wall Street firms instilled a short-term mentality in the investing public, they've also infused the same attitude on their own legions of portfolio managers -- to the detriment of the clients they are paid to serve. "Institutions grade their money managers on their performance every three months," writes Martin. "It's a practice that's designed to enforce short-term compliance with a unified investment approach for their money managers, but it ultimately undermines the long-term returns for the client."
Mutual funds and investment management firms closely monitor the quarterly performance of all of their portfolio managers to make sure they're not drifting too far from the market averages. They don't want their portfolio managers wandering off the reservation with a radical investment management approach that could alienate clients.
But by emphasizing quarterly performance, investment firms are forcing their portfolio managers to make buying and selling decisions for the short-term that are not geared to optimal performance over the long-term. Martin believes that most investment companies would do well to dispense with the quarterly reviews.
"There's no magic to three months, no special significance," says Martin. "Three months is meaningless in an investor's lifetime. It's just an arbitrary time frame that the institutions have adopted for their reviews that actually works against the best interests of the clients by stifling the use of intelligent, methodical strategies geared to the long term."
The emphasis on quarterly earnings reports is equally absurd, argues Martin. So is downgrading or unloading a stock just because it misses its quarterly earnings projections by a few cents. Great companies make decisions and implement programs that may take years to materialize. Their earnings in any given three-month period are really irrelevant in the big picture.