35 - Shorter Holding Periods are better (Investing First Principle)

Mental Models discussed in this podcast:

• Reversion to the Mean
• Moats
• First Principles

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Shorter Holding Periods are Better (Investing First Principle) - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode35

Hypothetical Question: Would you rather earn a 10% return in one year or ten years?

• To clarify: I don’t mean compound annual return, but total return. 
• Would you rather earn a total of 10% return in one year or in ten years? 
• When phrased in this manner, the answer should be obvious. (One year)
• The shorter the holding period, the better, all else equal. 
• When you hold total return constant, you want to earn that return in the shortest period possible. 

“All Else Equal” considerations - There are a lot of them

• Long-term thinking is critical for successful investing
• Difference between CAGR and Total Return
• The methods by which you earn a high long-term CAGR might be different from how you achieve a short-term high total return
• In the end, the long-term is made up of many short-term periods
• Value vs Growth Investing perhaps?
  • I consider all investing to be value investing
  • However, traditional Benjamin Graham value investing was the result of harnessing the power of mean reversion to earn high total returns over short time frames of 3-5 years. 
    • Net-Nets strategy
    • Buying at a 30-35% discount to fair value and selling when the stock price reaches fair value after a 50% gain. (The shorter time period over which this occurs, the most profitable the investment)
  • Warren Buffett is an advocate of buy-and-hold and his returns are driven by long-term growth investments in earnings over time.
    • Focus on High Quality
    • The longer that high profitable growth of earnings per share, the higher the returns.
    • Returns are driven by moats and high ROIIC.

Summary

Shorter holding periods for the same total return result in better investments. The key question: Is the brevity of your holding period within your control. I would argue it is NOT. While reversion to the mean is powerful and can be a huge driver of high returns, you should always make investments with a long-term time horizon. As Warren Buffett would advise, don’t invest in a company if you aren’t willing to hold it for ten years.