The Individual Investor’s Great Advantage Over The Pros

In the 1960s, American investors’ average holding period for stocks was more than eight years. By 2010 however, that timeframe had dwindled to just six months.

I have not come across any statistics for the holding periods for stocks for investors in Singapore (if you do, please let me know in the comments section below!). But if there had been a similar trend here as in the US, then it would be a real tragedy.

That’s because by choosing to hold stocks for shorter and shorter periods of time, investors are essentially surrendering one of the greatest advantages they have over the pros: Time.

Professional money managers can often be caught in a predicament of having to perform well over absurdly short periods of time that’s measured in months, weeks, or even days. This is captured well in an old 1997 video clip featuring Motley Fool co-founder and chief executive Tom Gardner and ex-hedge fund manager and now financial TV pundit Jim Cramer. Here’s a partial transcript of their exchange:

Gardner: We really support the notion that I think Warren Buffett and Peter Lynch have taught, and that is just simply invest for 10-year periods at a minimum. Put the money that you can put away for at least 10 years into the stock market. Don’t worry about where it’s going every three months or six months – that’s the work of the investment professional who’s paid on commission to move money in and out of different stock investment instruments.

What we say is get your money into great companies, great franchises… companies that are very profitable. And, don’t think about where the market is going or where your investments are going to in the next six months. Focus on the next six years or 60 years if you’re eight, nine, or 10 years old.

Cramer: My investors, they’d take it away from me if I take a six-year period – they’d think that’s a dodge. I gotta perform. Maybe I’m a dancing bear, but I don’t mind it. It’s the way good money management’s practiced. I’m supposed to beat the averages regularly. Beat them every day if I can; beat them every hour if I can. I’d love to take a six-year perspective, but the people whose money I’m running, they ain’t taking that so I can’t.”

The pros have career risk to worry about. Individual investors don’t – after all, we can’t sack ourselves after losing to the market for a year or two. If we’re investing for a goal that’s 10 or 20 years into the future, we only have to worry about how our investments will perform over that time frame.

Being forced to perform over the short-term can be debilitating. The chart below is from my colleague, Morgan Housel. It shows how US stocks have performed from 1873 to 2012 for different holding periods ranging from a day to 30 years:

S&P500 long-term returns

Source: Morgan Housel

As you can tell, the odds of making a profit over short time frames of less than a year are not much better than a coin-flip. Your odds of success can only be stacked in your favour when your investing-time-horizon stretches out to five years or more.

Similar dynamics have happened in Singapore’s stock market too. If you were to measure the Straits Times Index’s (SGX: ^STI) returns (without adjusting for dividends and inflation) at the start of every month from January 1988 to August 2013, you’d find that a one-year holding period would give you a 41% chance of making a loss. Meanwhile, a 10-year holding period will have presented you with historical odds of just 19% for making losses.

“The stock market is designed to transfer money from the active to the patient,” billionaire investor Warren Buffett once said. Keep this in mind the next time you find yourself being trigger-happy when it comes to buying or selling stocks. As individual investors, we have a big advantage over the pros by having the freedom to concentrate on the only investing-time-horizon that matters: The long-term. Don’t squander it.

If you'd like, you can also learn more about investing through a FREE subscription to Take Stock SingaporeSign up here to The Motley Fool's weekly investing newsletter that will teach you how to GROW your wealth in the years ahead.

Like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.