How long can you wait?
Through the massive decline in average holding periods, Nathan Bell weighs up trading versus investing.
Brian McNamee stepped down as CSL chief executive earlier this year, having been crowned Australia's best performing chief executive of the past quarter century. During his tenure Citibank found that CSL produced an annual total shareholder return of 25.9% over 23 years, with former Macquarie Group chief executive Allan Moss not far behind with a 23.8% annual return over his 15 years in charge. Moss' timing was impeccable, though, retiring in 2008 before the frightfully profitable Macquarie satellite model was rendered obsolete by the GFC.
I've heard numerous stories this year from people that regretted selling out of CSL many years ago, and only one where an investor referred to CSL as a once in a lifetime investment. Assuming he invested when McNamee took the helm, he has turned just $1,750 into $350k.
Very few people genuinely understand CSL's products and how they treat various diseases and immunodeficiencies, yet alone what products CSL will be selling in ten years' time and how profitable they will be. Two decades ago it would've been even more difficult to predict CSL's future, as it was merely a niche company processing blood and creating vaccines. No one could have seen how McNamee would build the world's number one blood products company with leading edge facilities and expert medical staff spread across the US, Switzerland and the rest of the world.
I imagine that CSL's share price would've looked expensive just about all the time, and gave you all the reasons in the world to sell and move on to a cheaper, more predictable business. Yet those that bought early and waited patiently as the company compounded their investment at high rates of return for over 20 years have got rich. When it comes to making many multiples on your investment, time and patience is the key.
Recently I stumbled on the following chart showing the average holding period for stocks on the New York Stock Exchange. Contrary to what I expected, the massive decrease in holding periods is not a relatively new phenomenon brought on by robotic trading algorithms, but rather one that has been in train for 40 years.
The good news is that with most investors' holding periods shrinking to the life of a mayfly, there should be plenty of opportunities for long-term investors to buy low and sell high.
Coincidentally, an email from Ben Strubel of Strubel Investment Management recently landed in my inbox discussing the same issue. You can see Ben's chart on average holding periods here. Ben then discusses the performance of traders.
Numerous academic studies have been done regarding trading behavior and results. A study by several California and Chinese professors found that over a 15 year period only about 1% of traders are consistently profitable. Note that doesn't mean they beat the market; it just means they actually made money. If you have been trading for 10 years and have made a grand total of $100 over that time, then congratulate yourself on being part of that 1%.
According to a 1999 NASAA study, 88% of traders lost money and 70% lost ALL their money. A separate 1992 to 2006 study found that 80% of active traders lost money. Keep in mind that this was during a bull market where the S&P 500 gained over 300%! Another paper from UC Berkeley studied 60,000 investors from 1991 to 1996 and found that the more investors traded the lower their portfolio returns were.
Why do most traders lose? Well, let me ask you a question. Would you rather face Tiger Woods on the golf course or at the bowling alley? (Are we still using him as the ultimate golfer, or is it Phil Mickelson now? Should I say an in-his-prime Jack Nicklaus?) Would you rather face LeBron James one-on-one on the basketball court or on the shuffleboard court?
When you are trading, you are going up against Wall Street in their own game. You are competing against datacenters filled with expensive computers programmed by teams of PhDs that have access to market information milliseconds before you do.
If you want market-beating returns, then you need to do something different. One of the world's greatest investors, Seth Klarman, is always at pains to tell investors that they need a competitive edge, but they're unlikely to find it trading against PhDs programming computers located close to exchanges.
There is one foolproof way that it is as easy as it is logical. Put a watchlist together of high quality compounding machines, wait patiently for Mr Market to throw you a fat pitch, load up and hang on. As Jesse Livermore said, 'the big money is not in the buying and selling but in the waiting'.
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