I am bashing out this blog as a result of a conversation with a mate which was along the lines that he finds it hard to hold things for the long-term and tends to bottle it at some point and end up selling when a decent Profit has built up; but often this might not be the best approach. Even a bit of a numbskull can figure out that if you continually sell Stocks after making perhaps 40% Profit, you will never ever get gains of 200%, 300%, etc., which are the ones that really transform your overall Returns.
Buying high quality Stocks and then holding them for long time periods has many advantages and of course many drawbacks. The benefits are really around ease of execution and low activity; which of course can lead to lower Dealing Fees and costs, and effort around selecting Stocks and general Portfolio Management activity.
However, it is underappreciated by many Stockmarket participants that in fact lower activity and longer holding periods can lead to superior Results. Of course there are many people who are highly active in the Markets and they add value by doing this, but for many, many others, this constant ‘tinkering’ actually hurts Returns. On top of this, such high levels of activity are difficult if you have a high-stress Full-Time Job; and if you are retired, then perhaps you should be enjoying your time rather than looking at a screen all day and going all boss-eyed.
I have talked about this many times but I think a lot of Private Investors would do well to weigh up the trade-offs inherent in how they approach the Market. Is it better to achieve 10% CAGR (Compound Annual Growth Rate) a year for low effort or to achieve 13% with a lot of effort? Is the cost in terms of Opportunity Cost and such things as social life and relationships with loved-ones and suchlike, worth an extra 3% CAGR of Return per year? This is something all of us need to consider but for me personally I would rather take the 10% and spend my summers in the Pub Garden with my mates. Of course, I am in the fortunate position where I only need a few % on my Portfolio each year to make sure my Living Expenses are nicely covered.
And I haven’t even mentioned Risk which of course is extremely important. In your striving for that extra 3% of CAGR you will be taking on more Risk and of course that could result in poor Results that could be avoided or at least mitigated by going for a lower Target. In reality it is not that black & white, but in general higher Returns and higher Activity do raise your level of Risk. If this higher Activity results from a disciplined Trading System then perhaps it can help to lower Risk, but we then start slipping into the ‘Traders vs Investors’ debate, which is not really something for this particular blog.
The more I do this game the more I get it hammered home to me that my biggest error in the past has not been to let Losers run, but rather to cut my Winners far too soon. You will never get a gain of 500% on a Stock if you always sell once you have a 30% gain and I look back at countless numbers of Stocks that I held many years ago but which are now up many multiples of when I sold them – it is agonising !!
It is not just the missing out on the fabulous Capital Returns from those Stocks that I sold, but also I will have missed out on rising Dividends that could have been re-invested and also it is quite possible that I sold those Great Stocks and moved the money into another Stock that might have been a complete Turkey. I haven’t gone back and checked the data because it would be far too time-consuming and difficult, but I have had plenty of Duds in my time so the chances are that I took Cash out of a Great Stock and it found its way into a Duffer.
I have scribbled out a Blog Plan on a bit of A4 Paper and I wrote a load of Bullet Points down about how to hold for the long-term, so I think the easiest way for me to get this down on electronic ‘paper’ is to just bash out a load of Bullets – so here goes:
OK, that’s it for Part 1. No doubt Part 2 will appear soon and in the meantime there is a new Twin Petes Investing Podcast out if you go to Soundcloud, Apple or Audioboom (see the ‘Podcasts’ page for details of how to find it).
Happy New Decade !!
These Blogs talk about the differences between ‘Investing’ and ‘Trading’ – one of the key things in your early days of interacting with the markets is to figure out which side of the divide you sit on (and want to sit on !!):
These blogs cover Targets and setting them can help keep you in a Long-term Position:
These ones on ‘Noise’ are really worth reading – there are links at the bottom to the first 2 parts:
I’ve probably changed my routines a little bit since writing this but it certainly gives some idea of how I ‘organise’ my day:
This one is about how to create a Spreadsheet structure to record your Trades:
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