The average holding period — how long an individual investor owns a stock — has been in decline for decades. According to Reuters, the average holding period reached its lowest point this past summer.
There are different ways of slicing it, but Reuters calculations based on New York stock exchange data show the average holding period for U.S. shares was 5-1/2 months in June, versus 8-1/2 months at end-2019. [emphasis added]
Chart from Reuters
We likely reached a new low in the average holding period, in part, because trading commissions dropped to zero across all the major discount brokerage platforms. “Free” trading attracted a lot of newcomers to the stock market looking for something to fill their time while they were stuck at home.
Mr. Nelson, who works for a marketing agency, used to try to trade during coffee or lunch breaks at the office. Now that he is working from home due to the Covid-19 pandemic, he said, it is easier to check his account and trade.
Coronavirus lockdowns have fueled the home-trading boom, said Thomas Peterffy, chairman of Interactive Brokers Group Inc., an online brokerage popular with day traders.
But just because you can trade stocks during your lunch break doesn’t mean you should.
In their paper “Trading is Hazardous to Your Wealth” Brad Barber and Terrance Odean found the following.
Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that trade most earn an annual return of 11.4 percent, while the market returns 17.9 percent.
Blackrock did a similar study from 1996 to 2015.
For the past 20 years, both stocks and bonds have delivered strong annual returns. But the average investor has earned nothing, adjusting for inflation. This is the conclusion of an analysis of “investor returns” by Blackrock that compared the difference between time-weighted returns (the published returns that are realized by mutual funds) and dollar-weighted returns (the returns earned on the money actually invested in those funds). The difference between the two, often called the “return gap,” is due entirely to trading decisions made by investors. [emphasis added]
Chart from Forbes
A Loose Market
An axiom in poker is when the rest of the table is playing fast and loose then you should tighten up. When the table is playing tight, you should loosen up your game.
We take a similar approach to investing. When the average market participant is playing loose and over trading stocks, we can play tight. We can increase our holding period to take advantage of longer-term compounding.
But simply increasing our holding period is not enough to ensure long-term gains.
Time + High Returns on Capital
Increasing our holding period only leads to long-term gains when we invest in a company that generates high returns on capital and the company can reinvest its profits at a high rate of return over many years.
The bonus is that high-quality high-returning businesses are disciplined capital allocators. They’ll only reinvest their profits in new growth initiatives if the project will meet the company’s minimum return requirements. If the project doesn’t meet the minimum returns, then the company will return the excess capital to its shareholders through dividends and share buybacks. High return on capital companies tend to always have excess capital that they can’t reinvest. As the company grows so does their dividend.
Increasing Yield on Cost
We don’t focus on the highest yielding dividend stocks. We want to find companies that can grow their dividend at above average rates. We want to grow your Yield on Cost as much as possible.
We believe this is the best possible way to replace your current income needs in a variety of market conditions and to hopefully prevent the withdrawal of your principal.
