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.

Finweek English Edition - - FRONT PAGE - Ed­i­to­rial@fin­week.co.za

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.