Has Buy-and-Hold Had Its Day?

The Motley FoolProbably one of the biggest misconceptions about stock market investing is the need to continually do something to reap bigger rewards. There are lots of other stock market fallacies but portfolio-fiddling is quite high up on the list.

The urge to tinker might go some way to explain why some investors – but thankfully not all – believe they need to constantly stir the pot to get tastier returns. However in investing, less can be more.

According to the number crunchers at Singapore’s Central Depository (CDP), retail investors, on average, held shares for around six months in 2007. That’s it – 180 days – 4,320 hours. That is how long a typical Singapore investor who bought shares six years ago would have held onto them for.

A three-to-one bet

That doesn’t strike me as being very long, at all. It can take me nearly that long to find the right shares for my portfolio. I don’t think I am especially fussy. I just want to know everything I need to know about the companies I invest in. I’m not alone in my meticulousness, either. Charlie Munger once said: “Look for a horse with one chance in two of winning and which pays you three to one.”

Those opportunities don’t come around that often – they can be as rare as hen’s teeth. But in the time that it might take me to find a suitable share, private investors in Singapore could have bought, held and already washed their hands of an investment.

Unfortunately, we don’t know whether those investors made any money from their shares. Some might have. But others probably didn’t hang around long enough to find out if they could have. The point is, a six-month holding period is barely enough time to qualify for (and collect) a dividend cheque.

Happily, things have improved from 2007. They haven’t got much better, but at least they have moved a step in the right direction.

Hairy moments

 The CDP said that in 2011, local investors had held their shares for 17 months. That’s 510 days. The CDP is still crunching the numbers for 2012. So, we might find out, before too long, the average holding period for shares last year.

Thing is, there were some moments in the stock market last year that could have made your hair stand on end. So, I am not holding my breath for any advance on 17 months. Nevertheless, I hope to be proved wrong.

In 2012, the Straits Times Index (SGX: ^STI) climbed from 2,646 points at the start of the year to 3,026 points three months later. Then it plunged 289 points to 2,737 points. A 10% drop could have tested the resolve of many – especially those with a nervous disposition or an anxious creditor.

But investors who threw in the towel would have missed out on the subsequent rally – a rise that took the benchmark index up to 3,107 points in October. By the end of the year, the Straits Times Index had risen to 3,167 points to register an annual gain of 20%.

In my view, even though investors held onto their shares for longer in 2011 compared to four years earlier, the average holding period of 510 days is still not very long. In fact, there are mammals that have longer gestation periods than that. So, in the time that it can take for a baby dolphin to be born, the typical Singapore investor will have bought a share, held it and subsequently sold it.

Forever is a long time

 It would appear that patience no longer counts when investing in shares. It would also seem that a share is quickly tossed onto the scrapheap if it does not perform as expected. Worse still, even if a share does do well, it might still be given the old heave-ho because it has done its job – it has delivered a capital gain, though in some cases the gain might only be a small one.

I don’t know about you, but my favourite holding period is forever, which is quite a long time. Warren Buffett once said that we should only buy something if we are perfectly happy to hold, even if the market should shut down for 10 years.

Admittedly, it takes commitment to buy shares that we are willing to own for the long term. But consider this: Let’s say that someone, ten years ago, had told you that you could reap returns of 20% a year, every year, for ten years. But you had to sit on your hands and do nothing for a decade. Would you be prepared to commit to a ten-year holding period?

I don’t know what your response would be. But I would definitely be looking around for the most comfortable chair in the room to sit on.

Shares like that do exist. In fact, eight Singapore blue chips have delivered total returns of more than 20% in the last decade. Another nine have delivered total returns of between 10% and 20%.

Come fry with me

 In other words, more than half of our Straits Times Index companies have delivered returns that have handily trounced inflation over the last ten years. What’s more, a total return of 10% would mean that an investment would have doubled in seven years. With return such as those, why on earth would anyone want to dip in and out of the market?

A taxi driver who picked me up outside Singapore Exchange probably provided me with the biggest clue. He told me that blue chips were boring. But in the same breath, he also lamented that he had lost a fortune “playing” the market with penny-share tips. The exact verb he used was “stir-fry“. He stir-fried shares and got burnt.

Warren Buffett once said: “Time is the friend of the wonderful company, the enemy of the mediocre” . So, instead of punting, which is better suited on rivers, spend time looking for those outstanding businesses that you can invest in for the long term. They might appear mundane but there is nothing dreary about doubling your money in seven years or less.

Buy and hold is not dead. It is not even sleeping heavily. It is very much alive and kicking, provided you have bought shares that you are happy to hold, even if the market shuts and does not re-open for a decade. And as far as stir-frying is concerned, do that in the kitchen and not in the stock market.