HOW LONG SHOULD YOU KEEP A STOCK?
Over the past decades, investors have started holding stocks for shorter and shorter periods. Contributor Simon Brown discusses how this trend affects profits.
how long do you hold a share you’ve bought as a long-term investment? Warren Buffett will say that long-term is forever, and that’s mostly true, but sometimes we do need to exit a longterm position. But how long are you holding your stocks on average? Further, how often do you check the price moves of your long-term holdings? Do you panic when they slip a few percentage points?
I know it is easy for an oldie like me to say that I seldom check the prices of my long-term holdings. Someone who’s new to investing is likely to check the moves many times a day.
But, ultimately, we want to get to a point where we’re able to ignore short-term moves. Sure, price is important but, given time, quality companies will see their share prices and dividend payouts rise. From week to week, even sometimes from year to year, the price may be moving weaker, but – as I always say – if we own quality stocks, the long-term rewards will reveal themselves and help us create wealth.
The end of long-term investing
What inspired this column was a graph I came across concerning a fact that I had frequently heard about but never seen illustrated. The graph shows the average holding period of shares on the New York Stock Exchange (NYSE) and was published by LPL Financial.
Back in the 1940s the average holding period was just over seven years, rising to just over eight years during the 1960s. Since then it has been falling and the current decade sees the average holding period down to around six months.
Six months! That totally stopped me in my tracks. Six months is not long-term investing – frankly that is short-term trading. Has the entire world moved to being short-term traders? Seemingly the answer is yes.
I did more digging, but couldn’t find the figures for the JSE. I assume they would be largely the same and certainly would show the same trend – that we’re holding stocks for shorter and shorter periods. We’re trading rather than investing.
Buy quality stocks and stick with them
My instincts say we’re not benefitting from the shorter holding period; in fact, the inverse should be true. Shorter holding periods likely make for poorer returns.
Think about predicting for a moment. If I asked you whether a share you owned would be higher in, say, 10 years, you’d likely confidently answer yes and you’d be right in most cases. But if I asked if it would be higher in 10 hours, days or even 10 weeks? That would be much more difficult to answer.
The reason is simple. A fundamental valuation will reveal itself over time – given years, quality listed stocks will move higher and do better than the market (the market being the average and the quality being the upper half of the average they’ll do better). Yet in the short term it is all about noise. Terror attacks, politicians, currency movements and the like will drive prices. To put it simply, these are moves that have nothing to do with the long-term fundamentals of the company.
So we need to step back and remember that investing is about the long-term. Buy quality stocks and give them the time they needs to perform. Knee-jerk reactions to short-term moves will not help us create wealth.
So as a long-term investor, add the following to the list of things you need to do:
1. Stop checking prices on a regular basis.
2. Remember that short-term noise is just that – noise.
3. Remember that this does not mean sticking your head in the sand. If things change in your quality company you may need to sell, but that is driven by the fundamental, not short-term noise.
Back in the 1940s the average holding period was just over seven years, rising to just over eight years during the 1960s.