Investing in a stock, says Roy Jespersen, is a lot like baking a cake: check the oven too often and you can spoil it.
That's what a lot of Utah investors have been doing in 1988, says Jespersen, a partner in the investment firm Wasatch Advisors. When they don't see the instant returns they're looking for, they tend to make decisions that spoil the cake - their portfolios."Patience," he says, is the operative word for investors.
Although most savvy investors understand the difference between saving and investing, Jespersen says it's a lesson that needs to be relearned - especially in this age of "instant everything" compounded by anxiety over the market fluctuations that began last October with Black Monday.
There is a strong temptation, says Jespersen, whose firm makes decisions on $160 million in investor assets, to compare the performance of investment portfolios with savings vehicles - bank accounts, Treasury bills, certificates of deposit.
But there is no comparison, he says. A saver agrees to accept a limited return in exchange for a limited risk. An investor agrees to accept unlimited risk for the prospect of unlimited return. The gulf between the two philosophies couldn't be wider.
Most investors know this, but still insist on evaluating their investments the way a saver watches his money earn interest: at a fixed, pre-determined rate over a short, usually quarterly, term. If the investment fails to show the predictable, short-term gains of the savings vehicle, the investor is unhappy.
(Some savings institutions even use various electronic devices to dramatically illustrate how your money "grows.")
But that's not the way investing works, counsels Jespersen. "The very word `investment' suggests a long-term undertaking. An investment requires a current outlay in the prospect of developing value over time."
Jespersen compares investing in the operating performance of a company - buying its stock - to the "investment" in education, the returns from which will accrue over a lifetime career.
In that light, it makes as much sense to calculate a quarterly or even yearly rate of return on a stock as it would to calculate the return on college tuition the first three months after graduation.
"When evaluating performance," says Jespersen, "return should be computed over a period sufficiently long for the investment to bear fruit. For savings this period is short and continuous. For a common stock investment, the relevant time period is several years; long enough for current management actions to come to fruition."
Daily stock quotations, says Jespersen, tend to give investors the impression that short-term rates of return can be computed, but that's an illusion.
"Continuous trading is a byproduct of the liquidity provided by the stock market," he said. "Rates of return, computed on short-term price fluctuations, have little meaning. Thus, it is not appropriate to compare quarterly savings returns with quarterly investment returns."
At one time, said Jespersen, corporations reported their earnings once a year. Now that none-too-long annual evaluation has been reduced to every three months. Money managers and mutual funds at the top of the quarterly lists are praised and those at the bottom are panned. That's short sighted, Jespersen believes. This quarter's winner is often next quarter's loser.
Finally, there is the need to evaluate performance by establishing a benchmark. Over the long term, stocks have historically provided higher returns than savings, but that doesn't mean that investment, as such, outperforms savings. Both have a return consistent with the risk borne by the investor.