Thursday, August 20, 2020

Long Term Investors Needed

"The investor's chief problem, and even his worst enemy, is likely to be himself."

-Benjamin Graham

I recently found an interesting chart, which shows the average length of time that investors hold their stocks for.

It looks like the average holding period for stocks has been on the decline over the past three or four decades.

It is of little surprise, if you understand basic economics of course. As the cost to buy and sell stocks decreased to pretty much zero, you will get a higher demand for the service and a higher volume at the lower price point. It is much easier to buy and sell stock today, versus the 1980s or the 1990s, when you had to call a broker, who would then have to call someone on the floor of the NYSE or AMEX or enter the order on NASDAQ. Then you would have to get paper certificates shuffled between brokers, and perhaps even finding their ways to te customer's home.

The ease of access and elimination of cost to invest has made it easier to trade. But that ease may be counter-productive for investment results. Most investors are better off assembling a diversified portfolio of blue chip stocks either directly, or by buying a diversified ETF, and then simply holding on to that investment. We as investors have never had it easier, since we have unlimited access to information at the same time as investment professionals, and we can buy and sell stocks easily at the click of a button. It has never been easier to build your own portfolio at no cost, and keep adding to it on a regular basis until you reach your financial goals and objectives.

However, all this information and noise makes us want to act and speculate. Most speculators end up losing money. A study I read a few years ago found that the investors who made the most trades in a given quarter had the lowest returns. The study is aptly titled "Trading Is Hazardous to Your Wealth"

It made sense in the old days that trading too much was costly, because you paid a lot in commissions. However, there is a bigger cost, which is behavioral. There are certain advantages of being a long-term investor. Shortening your time horizont over time turns those into massive disadvantages that you have to overcome.

The ease at which you can buy and sell stocks may cause you to overtrade. Most people who trade actively, lose money. Instead of focusing your attention on building a diversified portfolio and hold for the long-term, you end up speculating. I believe that the best way for the average person to make money in the stock market is buy buying a diversified portfolio of quality stocks either directly or through an ETF, and then sitting on it. That way they are letting the power of compounding doing the heavy lifting for them.

If you sell a perfectly good stock for no other reason than because it is easy to do so, you may be shooting yourself in the foot. After all, it is difficult to know in advance which would be the best companies in your portfolio 10 or 20 years from now. The problem is that a small number of companies in a portfolio would likely account for a large majority of future returns. Accidentally selling one of the big winners in your portfolio early in the game may be the difference between having a successful investment experience or having a mediocre investment experience that causes you to have to work for longer than you have to.

If it is very easy to sell stocks, many investors may be tempted to sell at the first sign of trouble. They may also sell otherwise good companies, because they may want to buy something that is flashier and is moving faster. This ability to sell stocks quickly may turn the average person from a long-term investor into a shorter-term speculator. I am rambling, but I do believe that having a long-term focus in investments can be beneficial. Most approach investing the same way they are buying lottery tickets. Perhaps people are forgetting that a stock is not a piece of paper of a ticker on a computer screen, but an ownership claim to a real business.

I have shared the story of the millionaire janitor Ronald Read several times on the site. He never made a high salary, yet he managed to accumulate a dividend portfolio worth $8 million, which also paid him a quarterly dividend of $60,000. He succeeded by buying and holding a diverse group of established blue chip companies that paid dividends and raised them regularly.

Some of the companies he held succeeded tremendously, while others failed. It was a slow but steady approach that focused on the slow and steady growth and reinvestment for companies with recurring cash flows that grew at a sustainable pace over long periods of time.  These were companies to own for decades, as they quierly compounded earnings, dividends and intrinsic values. Despite owning Lehman Brothers, his portfolio still succeeded, because he had a lot of other great companies that picked up the slack. He simply bought stock regularly, and reinvested his dividends.

What may have helped Ronald Read, and influence his behavior towards long-term thinking was the fact that he held most of his stock in stock certificates. Decades ago, when you bought stock, you called a broker and had paper certificates delivered to your broker or to you. As a result, selling because more cumbersome. But incidentally, when certain things are not easy, most people would just hold on to them. Which makes silly behavior such as selling a good company for no good reason than the fact that it is easy to do (acting on noise is basically letting you sell quickly for no reason). Incidentally, holding stock in the form of paper certificates may have further reinforced his strong conviction to be a patient buy and hold investor. I believe that we could all benefit from this type of thinking.

The reduction in fees and commissions has been great for long-term investors like us. It basically costs practically nothing to assemble and hold a portfolio of dividend paying stocks. The downside is that the ease of access and no commissions increase the temptation to go and trade stocks, which can result in behavioral costs to returns.

Good things take time to happen. By having a long-term mindset, we are more likely to capture the gradual business growth over time. Your goal as an investor is to own them, not to rent them.


Relevant Articles:

How to think like a long term dividend investor
The advantages of being a long-term dividend investor
Dividend Growth Investing Promotes Long-Term Thinking
How to improve your investing over time

No comments:

Post a Comment

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts