35 - Shorter Holding Periods are better (Investing First Principle)

Mental Models discussed in this podcast: Reversion to the Mean Moats First Principles Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience.  Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. 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. Summary 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.