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Investing can be easy, but if you want it to be then you probably have to accept that you won't beat the market. In which case, you simply join the market and invest your money into a low-cost tracker fund. But you won't get rich this way, or if you do the time you need to get rich means that you will be too old to enjoy your wealth. It will take about 42 years to turn £10,000 into £1,000,000 if you manage to get 12% compound return each year -- this is not really a bad thing, your children or grandchildren will love you very much for the inheritance that you leave behind!
To get rich you must beat the market
The only way that anyone can become seriously rich through investing is to consistently beat the market over the long term. Even if you manage to get a compound annual return of 25% a year, it will still take you 22 years to turn £10,000 into £1,000,000; and remember, to get 25% a year would put you in the ranks of the super-investors alongside Warren Buffett. The question is: how do you beat the market consistently and significantly? By buying and holding quality companies for the long term, that's how!
But people are saying that the Foolish mantra of Long Term Buy and Hold is no longer a suitable strategy. Even our Foolish long term buy and hold portfolio, the Qualiport, appears to be having doubts: a quick glance through the Qualiport archives reveals the portfolio's managers mulling over past poor performance and trying to find out how they can learn from past mistakes.
The agonies of the Qualiport
On the 21st August Bruce Jackson, co-manager of the Qualiport, made a confession. Bruce wrote:
"We've got it all wrong. The Foolish investing mantra of "long-term-buy-and-hold" is baloney. We've missed one very important component which should be part of any investing strategy. It's called selling."
Bruce concluded that the key to successful investment was knowing when to sell, and he set a new selling criteria: "Sell if the company becomes fully valued". He wrote:
"If after 3 months a company went from undervalued to overvalued, sell it. This will be very rare, especially as the Qualiport will still be looking to buy quality companies. But selling after, say, a two-year holding period could become more common."
Now, I would say quite strongly that the original aims of the Qualiport -- that of long term buy and hold -- are aims that should not be dropped. The Qualiport's problem has not been its inability to sell shares, it has been the inability to buy companies that the managers have been comfortable to hold and hold and hold. The problem is with the companies bought and the selection process, not with the long term buy and hold idea.
Maynard Payton (TMFMayn), the co-manager, has also been looking at the performance of the Qualiport. He did some interesting research on Warren Buffett's investments over the years in his article on the 6th September. One of his conclusions was that:
"The company that can be bought for the long term is the investment exception not the rule. Of the 43 different purchases made by Buffett, 35 were sold within ten years. Most went in under five."
Maynard concluded that: "When you can't find great long-term businesses operating within an industry you understand selling at a bargain price (which will be most of the time), then consider short-term investments outside your main focus."
Beware the short term!
This shift towards some short-term investments worries me. If you cannot find an investment that you think will be a good long-term investment -- and by that I mean 5 years, 10 years or preferably much longer -- then you should simply stick the money into the bank and wait for your long-term investment opportunity to come along. Trying to pick successful long-term investments is hard; trying to pick successful short-term investments is almost impossible, and takes someone with a large amount of skill and a massively sensitive investment "nose".
Warren Buffett has this nose, but even so his average holding period for his stocks, according to Maynard's research, is 6.14 years. It may be that he does sell some stocks when it becomes clear that his initial investment reasons have changed, but it is clear that he is not inclined to short-term trading in the stocks that he owns, and he does not buy them with the aim of making a quick short-term profit.
The problem with most people's portfolios is that they buy and sell too many shares, too often. It's easy to work out why. Buying and selling shares is the fun part; holding them is downright boring! Have a look at your own portfolio; how many individual companies are represented? It's likely you will have quite a few, perhaps even 15 or 20 individual companies -- which is far too many. How many of these have you held for 10 years or more? I bet it's none! How many shares have you held for 5 years or more? Again, I bet very few Fools out there have any stocks in their portfolio that they have held for 5 years or more! The trouble is, many people buy too many different companies for their portfolio: they buy too often, and they sell too often.
The challenge to the idea of long-term buy and hold is that businesses change, and if they do you should be prepared to sell shares. Sure -- you must sell shares if you have made a mistake. But the problem with most short-term traders' portfolios is that they don't put enough effort or thought into the buying decision. The essence of a long-term buy and hold portfolio is not knowing when to sell; it is knowing which companies to buy in the first place.
Conclusion
Do your research before investing. Many people follow a hunch or a tip and invest in a company without doing any research; some people will do more research when they are buying a car than they will when they are buying shares. Take your time when you are investing. It can seem that if you don't invest now you might miss the next "big thing", but rushing to invest your money is the biggest mistake that you can make. If that takes you some years then so be it; don't be afraid of holding cash, the money can be left safely tucked away in a high interest bank account while you are looking.
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