Billionaire investor Warren Buffett, talking about his investing style at Berkshire Hathaway, famously once said: “Our favorite holding period is forever.” He’s also suggested that if we wouldn’t be happy to hold a stock for 10 years, we shouldn’t hold it for even 10 minutes.
But in December 2021, Visual Capitalist reported a big fall in the average holding period for stocks on the New York Stock Exchange. The investigation discovered that the average holding period peaked at eight years back in the 1950s. But by 2020, investors were holding on to their shares for an average period of less than six months.
There are plenty of reasons why. Technology has made trading easier and cheaper than ever before. And the free flow of news, rumour, gossip, and even fraudulent stock promotion has led to people trading faster than ever before.
Attention span
Investors’ attention spans do seem to be getting shorter and shorter. And I reckon that’s bad news for their long-term returns.
There is, though, an argument that companies don’t last as long as they used to. I can see that growing as a trend, especially when it comes to the increasing number of small high-tech hopefuls that crop up with regularity.
But to me it’s a reason to simply avoid them. If I see a company and I can’t even guess whether it will be in 10 years, not a penny of my money is going anywhere near it. I might miss out on some quick profits. But I reckon I’ll avoid more risks and potential wipeouts.
10 years
Despite changes in technology and in markets, I still believe Buffett‘s 10-year rule is a good one. In fact, I think it might be more important now than it’s ever been. But it is often misunderstood.
If we have to hold our stocks for at least 10 years, what are we supposed to do we do if something goes wrong? I’ve often heard people ask that, when dismissing the idea of holding for 10 years as ideological and impractical.
But the answer is easy. If something goes wrong, sell. Warren Buffett does it all the time. His thing about holding a stock for at least 10 years does not mean regardless of what might happen.
Selling
No, here’s the way I see it. When I investigate a stock with a view to buying, I always ask myself whether it’s one I’d like to hold for a decade. I will only buy if I can answer with an enthusiastic yes. That does not mean I’m not then allowed to sell.
But what it does mean is that I’m a lot less likely to buy shares that I’ll want to sell.
So that’s my key take from the Warren Buffett method when it comes to holding periods. If I see a stock that I think I might want to buy for a couple of years, then sell if it comes good… I’ll turn away.
Holding for the long term reduces costs, it reduces stress, and I’m firmly convinced it reduces risk too.
