What Does Long Term Actually Mean?

There was a post at Seeking Alpha about client holding Johnson & Johnson (JNJ) with the title JNJ Is Not A Good Long Term Investment For 2012. This was a pretty funny headline. The author made a bearish case mostly noting the lawsuits and image problem. The author went on to suggest a debit put spread on the stock (a bearish strategy).

The conclusion he drew and the trade he suggested will  either turn out to be right or wrong but more interesting is the question of what long term actually means. If the author of the above article is an options trader then the rest of 2012 could easily be long term. I've owned JNJ for clients since I started this phase of my career in 2004 and hope to hold it forever.

This is a recurring theme here. For most market participants, picking good stocks or suitable funds to be held for the long term is better than a lot of short term trading. Clearly plenty of people have success with shorter term trading strategies but that does not make it ideal for most participants.

Holding forever is more of a goal than anything else. Long time readers might recall past posts about Bank of America (BAC) which was bought in 2004 with the hope of being a forever hold and back then this was plausible.Not everything that happened with BAC was ideal (talking before the crisis) and this is true of all holdings but right or wrong the name was not necessarily a sell... until the Lehman weekend. Hold forever became an immediate sell overnight, literally.

Some of the benefits of holding forever, or hoping to can be read here but basically there is long term compounding in terms of the growth of stocks and funds that turn out to be good choices and also dividends. You've probably heard that people who bought what is now Altria (MO) in the mid 1980s (and held) now collect a dividend that is greater than their cost basis--their yield is more than 100%. I don't actually look at it that way; there is a dividend that right now is 5.1% of the value of the stock but some folks do, it has clearly compounded out over time into a monstrous winner.

This sort of thing can make investing a little easier and of course cannot be captured if the typical holding period is 6-24 months. When the time frame is that short then performance relies far more short term market signals and correct assessment of short term trends/momentum. If that sounds difficult then your time frame should probably be longer than that.