Mental Models discussed in this podcast:
- Reversion to the Mean
- 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.
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.