QUALIPORT
When It Pays To Be Idle

By Maynard Paton (TMFMayn)
June 28, 2005

"Lethargy bordering on sloth remains the cornerstone of our investment style" -- Warren Buffett

Investing is one of the few activities in life where idleness can be a real positive. Buying a group of solid, sound companies -- and simply holding on -- frequently provides better returns than frantic trading activity. Just ask Mr Buffett or any index tracker fan.

Indolent investors obviously benefit from a reduction in frictional costs. Cutting out the extra stamp duty, dealing charges and spreads all helps to bolster a portfolio's performance.

Another reason why the 'idle' stock picker tends to do well is that discovering great investment opportunities is hardly a day-to-day event. You see, nobody can be an expert on every listed company. What's more, other investors (save for the odd panic) are loathed to sell down their holdings at give-away prices. Those who believe they can regular trade in and out of 'bargains', therefore, often end up extracating themselves from deservedly cheap shares. Indeed, a study of 66,000 individual trading records by academics Terrance Odean and Brad Barber concluded the most active stock pickers trailed the least active by an average of 5.5% per year. Read more.

And of course, most people are far too confident about their trading abilities anyway. Human behaviour carries a lot of baggage and many of the most ingrained 'caveman' character instincts derive from a sense of self-importance or ego. While bravado may have been a necessity to survive in the Stone Age, over-confidence in the financial markets generally equals overtrading plus underperformance. Read more.

Turnover

'Portfolio turnover' is the term that measures the share-dealing activity of an investor. Expressed as a percentage, it's calculated by dividing the money raised from selling shares and subsequently reinvested by the portfolio's value. A turnover of 100% indicates the portfolio has essentially sold all of its holdings and reinvested the lot elsewhere.

Calculating an accurate portfolio turnover figure is not straightforward. What happens when a share is sold but the proceeds are not reinvested? What about the portfolio's fluctuating value? New money, reinvesting dividends and accounting for commissions are other complications.

Help is at hand, however, from discussion board regular Gengulphus. He declares: "As a rough measure, I would add up the values of all the buys and sells in the year, divide by two, and then divide by the value of the portfolio."  After noting the many difficulties to arriving at a pinpoint figure, Gengulphus concludes: "I would just do the straightforward rough calculation suggested above and leave out the refinements."

Qualiport trading

The table below reveals the Qualiport's turnover percentage since 2001. To keep things simple, prior years were not studied as new money was at that time added to the portfolio. Furthermore, the average portfolio value is calculated by using only the start-of-year and end-of-year levels. Dealing commissions and other costs are not included.

Year	Average portfolio value (£)	Buys plus sells divided by 2 (£)	Portfolio turnover (%)
2001	21,982	10,409	47
2002	20,057	6,394	32
2003	20,341	4,248	21
2004	26,131	3,341	13
2005*	28,317	0	0

(*to 27 June 2005)

So, a favourable trend. Indeed, the Qualiport has not bought or sold a share for over eight months now -- the longest period without a trade since the portfolio's formation in 1997! Going on the figures for 2001-4, average annual turnover comes to 28%, which suggests the Qualiport typically holds a share for about 3.5 years. But as noted earlier, the portfolio no longer benefits from regular cash injections. Unlike most real-life investors, who would receive additional funds every so often, the Qualiport has to sell to buy when it's fully invested. This situation does increase the portfolio's turnover calculation.

To give some background to the turnover figure, this table lists the holding period for each portfolio share (past and present):

Share	Time held since initial investment
Present:
Associated British Ports (LSE: ABP)	1 year
Emap (LSE: EMA)	7 years 2 months
Halma (LSE: HLMA)	2 years 3 months
Johnston Press (LSE: JPR)	3 years 9 months
London Stock Exchange (LSE: LSE)	2 year 6 months
Past:
Carpetright (LSE: CPR)	2 years 10 months
Dell Computer (Nasdaq: DELL)	2 years
DFS Furniture (LSE: DFS)	2 years 2 months
Independent Insurance	2 years 3 months
Lloyds TSB (LSE: LLOY)	3 years 5 months
Marks & Spencer (LSE: MKS)	1 year
Misys (LSE: MSY)	1 year 5 months
MMT Computing	1 year 4 months
PizzaExpress	4 years
Rentokil Initial (LSE: RTO)	2 years 1 month
Unilever (LSE: ULVR)	1 year 11 months

With the Qualiport now over seven years old, a 3.5-year investing timescale does not sit too comfortably with the 'holding for the long term' strategy. However, the portfolio has made mistakes in the past and -- after some navel-gazing -- cut its losses. Clearing out the laggards -- responsible for much of the selling in recent years -- has in fact bolstered the portfolio's performance significantly. Nevertheless, with the Qualiport now happy with its present stable of companies, the turnover aim for the rest of 2005 and beyond is simple: to keep as close to 0% as possible.

More: The Cost Of Portfolio Turnover | Common Investing Mistakes

A version of this article was first published in February 2004. It has been updated. Maynard owns shares in Associated British Ports, Halma, Johnston Press and London Stock Exchange.

Portfolio value

Holding	Number of shares	Closing price 27/06/05 (p)	Value (£)
Associated British Ports	681	478	3,255.18
Emap	372	799.5	2,974.14
Halma	1,920	144.5	2,774.40
Johnston Press	1,608	477	7,670.16
London Stock Exchange	2,018	482	9,726.76
Cash			345.54
Total			26,746.18