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

The DIY Investing Podcast

Release Date: 07/14/2019

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More Episodes

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.