According to a report prepared by LPL Financial in 2012, the average holding period for a stock back in the 1960s in the U.S. was eight years. By the same year the report came out, the average holding period was just five days. Having a holding period of just five days is akin to gambling and that’s a pity as the shorter your holding period is, the higher your chances of making losses in the market. This is where property investors come in. A typical property investor This is of course a generalization, but most property investors are…
According to a report prepared by LPL Financial in 2012, the average holding period for a stock back in the 1960s in the U.S. was eight years. By the same year the report came out, the average holding period was just five days.
Having a holding period of just five days is akin to gambling and that’s a pity as the shorter your holding period is, the higher your chances of making losses in the market. This is where property investors come in.
A typical property investor
This is of course a generalization, but most property investors are cautious and invest for the long-term. Here’s what they usually do before choosing a property to buy:
- Perform thorough research (on things like location, rental rates, and quality of the property) and compare with other alternatives.
- Take their time to decide to make sure they’re not making an illogical decision.
- Value their properties based on how much rent can be collected.
- Hold an investment property for years before selling.
- Make sure they have sufficient liquidity to survive if there’s a downturn for a number of years.
A typical 5-day stock “investor”
In contrast, here’s what a stock market participant who holds a stock for only five days would likely do when he or she “invests”:
- Buy a share based on rumours or tips.
- Check the price of their shares every day.
- Does not bother to perform any research on the company’s business.
- Has no clue about the intrinsic value of a company.
- Has already planned to sell the moment he has clicked “buy.”
Fixing the 5-day investor syndrome
As you can see, the property investor’s approach is vastly superior to that of the 5-day-investor. Billionaire investor Warren Buffett would also concur.
Buffett once suggested that all investors should make investing decisions based on a 20-idea punch card. The punch card concept is that investors should imagine that they would only have 20 chances to make an investment in their lifetime. Once the 20 chances are used up, an investor would never be able to make another investment ever again.
Doing so would make us consider each investment we make very seriously. In this way, we will also be able to truly understand every investment we make and be confident enough to hold them for the long term.
Does long term investing work?
At this point, some might question the efficacy of long-term investing. So, let me give a simple example.
Back in 1997, The Motley Fool’s co-founder David Gardner decided to buy U.S. internet retailer Amazon.com. Keep in mind that this was the late 1990s, when the dotcom bubble in the U.S. was frothing. When the bubble eventually burst, David’s Amazon investment collapsed too. But, he continued to hold onto the shares of the company as he believed in the firm’s long-term prospects.
Last year in March, Amazon closed at a price 10,000% higher than what David had first paid for its shares back in 1997. In other words, David had made a 100-bagger over those 17 years.
How else would David have been able to enjoy such incredible gains if he was not a long-term investor?
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any companies mentioned.