UNSAFE AT HIGH SPEED

"Confusing speculation with investment, Graham warns, is always a
mistake. In the 1990s, that confusion led to mass destruction. Almost
everyone, it seems, ran out of patience at once, and America became
the Speculation Nation, populated with traders who went shooting
from stock to stock like grasshoppers whizzing around in an August
hay field.
People began believing that the test of an investment technique
was simply whether it “worked.” If they beat the market over any
period, no matter how dangerous or dumb their tactics, people
boasted that they were “right.” But the intelligent investor has no interest
in being temporarily right. To reach your long-term financial goals,
you must be sustainably and reliably right. The techniques that
became so trendy in the 1990s—day trading, ignoring diversification,
flipping hot mutual funds, following stock-picking “systems”—seemed
to work. But they had no chance of prevailing in the long run, because
they failed to meet all three of Graham’s criteria for investing.
To see why temporarily high returns don’t prove anything, imagine
that two places are 130 miles apart. If I observe the 65-mph speed
limit, I can drive that distance in two hours. But if I drive 130 mph, I
can get there in one hour. If I try this and survive, am I “right”? Should
you be tempted to try it, too, because you hear me bragging that it
“worked”? Flashy gimmicks for beating the market are much the
same: In short streaks, so long as your luck holds out, they work. Over
time, they will get you killed.
In 1973, when Graham last revised The Intelligent Investor, the
annual turnover rate on the New York Stock Exchange was 20%,
meaning that the typical shareholder held a stock for five years before
selling it. By 2002, the turnover rate had hit 105%—a holding period of
only 11.4 months. Back in 1973, the average mutual fund held on to a
stock for nearly three years; by 2002, that ownership period had
shrunk to just 10.9 months. It’s as if mutual-fund managers were
studying their stocks just long enough to learn they shouldn’t have
bought them in the first place, then promptly dumping them and starting
all over.
Even the most respected money-management firms got antsy. In
early 1995, Jeffrey Vinik, manager of Fidelity Magellan (then the
world’s largest mutual fund), had 42.5% of its assets in technology
stocks. Vinik proclaimed that most of his shareholders “have invested
in the fund for goals that are years away. . . . I think their objectives are
the same as mine, and that they believe, as I do, that a long-term
approach is best.” But six months after he wrote those high-minded
words, Vinik sold off almost all his technology shares, unloading nearly
$19 billion worth in eight frenzied weeks. So much for the “long term”!
And by 1999, Fidelity’s discount brokerage division was egging on its
clients to trade anywhere, anytime, using a Palm handheld computer—
which was perfectly in tune with the firm’s new slogan, “Every second
counts.”
And on the NASDAQ exchange, turnover hit warp speed, as Figure
1-1 shows.4
In 1999, shares in Puma Technology, for instance, changed hands
an average of once every 5.7 days. Despite NASDAQ’s grandiose
motto—“The Stock Market for the Next Hundred Years”—many of its
customers could barely hold on to a stock for a hundred hours.
"
from "The Intelligent Investor" book by Benjamin Graham

Read the book here