"Don't just do something, stand there!" might just
be the best least-followed advice in investing.
If there is one statistic that is, if anything, more
depressing than the last empty decade of equity returns, it is the fall and
fall of average stock holding periods.
While the average holding period of a NYSE-traded stock was
10 years in the late 1930s, the trend since 1995 has been down and down, driven
by ever more frenetic trading. By 2010 the length of time the average share is
held was down to a mere six months, according to NYSE data, a real testament to
the eternal triumph of hope over experience.
To be sure, the rise of high frequency trading has played a
role in driving down average holding time, but others have become more active
Estimates vary, but the average domestic equity
actively-managed mutual fund in the US has an annual turnover rate of between
89 and 130%.
This may be great for the brokerage and mutual fund
industries, but for investors it is just about the opposite of what should be
"Be patient and focus on the long term. Wait for the
good cards. If you've waited and waited some more until finally a very cheap
market appears, this will be your margin of safety," famed value investor
Jeremy Grantham of GMO wrote in a note to clients.
"Now all you have to do is withstand the pain as the
very good investment becomes exceptional. Individual stocks usually recover,
entire markets always do."
The poker metaphor is apt. Like playable poker hands, great
investment opportunities don't come along that often, certainly far less often
than we would like. The natural tendency, then, is to try and force things by
assuming that our jobs as investors is to always be fully invested and to
simply choose the best available option.
While cash in a portfolio is a wasting asset, losing
purchasing power to inflation over time, it is also extremely handy when
opportunities actually present themselves. The less clarity there is about the
outlook, and right about now there is very little, the higher the option value
Low conviction, high activity
And yet so many investors carry on doing a lot of low
conviction trading, as if they can somehow make up in volume the lack of
excellence in their individual investment ideas.
That's natural, as human beings tend to favour activity over
observation, though that is a strategy that perhaps worked better for our
ancestors seeking food sources on the primordial savanna then it does for an
investor screening stocks.
This tendency is doubly true for professional money
managers, who feel pressure to appear to be working hard and who may benefit
from fee-generating activity. Grantham sees the freedom from this as a key
advantage individuals have over professionals, though his own career
demonstrates that you can be successful and patient.
It is also true that the obsessions of the quarterly company
earnings cycle can foster a short-term volatility-orientated style in investors
who should be thinking in years, not months. Much of what gets written about
stocks by analysts and discussed on television turns out to be so much noise,
background static, that is best tuned out.
This does not mean that earnings beats and misses are to be
ignored, but that it is really easy to get mesmerised by the expectations
machine that is financial markets and get sucked, emotionally, into trading too
The other key thing to remember is that patience is
important as both a buyer and a holder of shares. It is important to wait for
your margin of safety in valuation before buying, but as a holder it is also
important not to sell too quickly when the market goes against you.
And of course, the one sure thing in all of investment is
costs. When you make a trade the losses or gains you may get in the future are
only a matter of speculation and conjecture, the execution cost of the trade is
the only thing that is inevitable and easy to measure.
* James Saft is a Reuters columnist. Opinions expressed are