For some people, investing is a buzz. It gets their pulse racing and when they ‘win’, it can prove to be a very enjoyable experience. For them, investing is little different to gambling in terms of piling-in, watching their investment intently, and then selling up when a profit has hopefully been made.
Of course, not every trade that takes place this way is a profitable one. In fact for many investors, trying to dance in and dance out of shares can prove to be a rather disappointing experience, with losses quickly racking up.
Even investors who think they’re adopting the buy-and-hold strategy made famous by investors such as Warren Buffett and Charlie Munger may only give their investments weeks or months instead of the years and decades they require. After all, Warren Buffett apparently once said that his favourite holding period is forever.
A key reason for that could be that shares are small slices of businesses and like it or not, the business world moves very, very slowly. Certainly, new technology releases may make us all feel as though the world is moving much faster than it is, but the reality is that the vast majority of companies are selling either the same or very similar products and services as they were last year. And in a year’s time they’ll probably not be doing much differently either.
Therefore, buying shares entails a commitment to hold that company in a portfolio for a handful of years. That’s often how long it can take for a new strategy or new product line to emerge and have a major impact on a company’s bottom line.
Slow and steady
Clearly, economic forces can have a significant impact on a company’s sales and profitability. But even these tend to transition slowly, with boom periods lasting over the medium term, to be gradually replaced by a recession and vice versa. And while the volatility of share prices may be high in the meantime (especially as the economy transitions from one period to the other), predicting how share prices will move over a short period of time is intensely challenging. Moreover, it’s very time consuming and an individual can easily invest huge amounts of time for scant reward.
In addition, dealing costs can soon mount up for investors who hold their shares for one year instead of 10 years, for example. Assuming a £12.50 dealing charge, an investor with 20 stocks in their portfolio could end up spending £500 per year versus just £50 a year for their buy-and-hold peer. Such costs can really add up over an investor’s lifetime.
So, while buying and selling shares over a short time period will sometimes work out well and can be very exciting, in the long run history tells us that taking an ultra-long term view is likely to not only be more profitable, but can leave you to enjoy the non-investing parts of your life to a greater extent.
