Is holding stocks for the long run worth your time?
By Eugene Ng
Warren Buffett once said that “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
However, there are only so many decades in our life. Are you willing to spend, as Buffett suggested, 10 years holding stocks? Would it be worth your time?
Holding stocks for the long term has big rewards.
Pull out any long-term stock market index chart of at least 20 years or more, and it is often a straight line that starts from the lower left and rises to the upper right.
Take the S&P 500 index, for example. It has returned approximately 8 per cent in annualised gains over the last 70 years, turning US$100,000 into over US$21.9 million dollars.
A short holding period despite evidence of long-run returns
A recent analysis by Reuters using New York Stock Exchange (NYSE) data indicated that the average investor now holds stocks for less than 5.5 months.
This period is significantly shorter compared to the 3 to 8-year holding period from the 1940s to the early 1980s.
The rise of instantaneous information flow, along with the convenience of electronic trading platforms, certainly do not help, making it easier for anyone to choose to trade stocks rather than invest in them for the long term.
Trying to win a losing battle
The preference for trading stocks has a severe downside, because the odds weigh heavily against investors when their time horizon is shortened.
Consider the chart that was first shared with me by Motley Fool Co-Founder, Tom Gardner, more than seven years ago.
In a single day, your probability of winning in the stock market is roughly similar to a coin toss, about a 50-50 chance. Extend that out to one year, and your chances increase to over two-thirds probability.
Stretch that to 10 years, and almost 90 per cent of every 10-year period is positive. Do it for 20 years and more, it is 100 per cent positive, and you never lose any money.
Getting the basics right
Basics and fundamentals are important, just like the solid foundational pillars to build a house that can last. Get the basics right, and you are more likely to do better. Get it wrong, and you are more likely to struggle.
The question you should ask yourself is - do you want to play a game where the odds of winning are in your favour right from the start, or one where the odds are heavily stacked against you?
Power laws drive the majority of long-term returns
For the adventurous among us, holding individual stocks can provide even better returns.
But there are caveats to note.
Hendrik Bessembinder’s 2020 study -“Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks” - found that very few publicly listed companies accounted for the majority of global stock market returns.
The top 0.25 per cent (160), 0.5 per cent (319) and 1 per cent (638) of stocks accounted for about 50 per cent, 64 per cent and 80 per cent of returns. In other words, a small minority of stocks account for the significant majority of returns[1]. This phenomenon is referred to as the power law.
The implication for investors is that only a small handful of the best companies in the world are worth investing in, and will generate the majority of long-term returns. It follows that we need to find these winning companies, own them, and keep adding to them over the long haul.
Patience can be very rewarding
If you are patient, the payoff can be tremendous. The maximum you can lose on a stock is 100%, thus the downside is limited.
Conversely, the maximum you can win on a stock is theoretically infinite, where multi-baggers can rise five times,10, or even 50 or 100 times, or more.
The potential upside is, therefore, unlimited. This very favourable asymmetric risk-return profile results in a very positive skew and power laws.
The few long-term large multi-bagger winners often account for the majority of returns, overwhelming all the losers. Over time, these outsized winners will become more and more significant, and the losers will naturally become less and less relevant.
We too have similar observations from our own investment portfolio.
By allowing our winners to run, the accumulated gains from our top 10 and 20 winners (out of 84 positions as at 31 Dec 2021) accounted for 75 and 91 per cent, respectively, of our entire portfolio’s accumulated gains over almost five years.
Extending that to our 10 biggest winners, the combined gains are more than 11 times of all of the losses of all our losers combined.
On a return basis, we had 29 multi-baggers (about 34 per cent of the portfolio) whose gains are in excess of 100 per cent.
The top three winners are more than ten times, seven times and five times on our invested capital thus far respectively.
Our personal experience adds evidence to the data that holding stocks for the long term works.
Expect volatility
Very often, one of the reasons why investors find it hard to hold for the long term is that the stock market can be very volatile in the short term.
In the short term, the market can go down faster than it goes up.
On average, the market falls roughly 10 cent every 1 year, 20 per cent every 4 years, 30 per cent every decade, and 40 per cent or more every few decades.
More than 90 per cent of the time, the stock market is trading off its previous historical high.
Price declines are absolutely normal. However, we don’t know in advance when and by how much they would fall. But we should expect it, always.
Over the long term, the market has shown that it goes up more than it goes down. That’s why the long term is the only term that counts and matters, and the rewards will be well worth your time.
The writer is the Founder of Vision Capital, focused on long-term investing in global equities and author of the book “Vision Investing: How We Beat Wall Street & You Can, Too!”.
