The perilous decline of long-term investing - From Visual Capialist
“Our favourite holding period is forever.”
Those are words from arguably the world’s most successful investor Warren Buffett, an advocate of the buy and hold approach to investing that I follow and strongly endorse. As you know, buy and hold is a long-term strategy in which shares are gradually accumulated over time, regardless of short-term performance.
And while Buffett is undoubtedly a successful investor, data from the NYSE suggests that fewer are following his advice than ever before. As of June 2020, the average holding period of shares was just 5.5 months. That’s a massive decrease from the late 1950s peak of 8 years. So the Visualist Capitalist website explains.
Technological drivers
This decline in holding periods appears to have been caused by a number of factors, with the most prominent one being technological advancement.
For example, in 1996 the NYSE switched to a fully automated trading system. This greatly increased the number of trades that could be processed each day and lowered the cost of transactions.
A Visual Capitalist article explains how automated exchanges have led to the introduction of high-frequency trading (HFT), which uses computer algorithms to analyse markets and execute trades within seconds. HFT represents 50% of trading volume in U.S. equity markets, making it a significant contributor to the decline in holding periods.
Technology has enabled investors to become more active as well. Thanks to the internet and smartphones, new information is widely distributed and easy to access. With online trading platforms, investors also have the ability to act on this information immediately. And it’s tempting to do so.
Avoiding temptation
So, if you ever find yourself in the position where you’re seduced by the possible short-term gains of a quick punt, I suggest you do one of two things.
Take a look at the potential risks involved in taking that punt, laid bare by the recent conviction for fraud of Theranos founder, Elizabeth Holmes.
Or remind yourself of the benefits of that buy and hold strategy: Uninterrupted compounding.
(Or give me a call for a second opinion).