Do You Rent or Own?
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Thursday, December 11, 2014
It’s a question that is always being asked when it comes to housing, but not enough when it comes to investment portfolios.
In 1960, if someone bought a stock, they would hold the shares for an average of over eight years. Today, it’s down to a fleeting 1.5 years. This shift in behavior can be attributed to many factors such as cheaper transaction costs, real time quotes, and faster dissemination of information. It’s never been easier to react to news flow than it is today, which is driving people to trade rather than invest. Put succinctly, more and more people are choosing to rent stocks rather than own businesses.
Sadly, activity is a nemesis of investment returns. A few months ago, Investor James O’Shaughnessy was on Bloomberg Radio discussing holding periods. Mr. O’Shaughnessy shared an anecdote about a Fidelity Investments study that looked at the best performing accounts at Fidelity. Their findings? The best performing accounts belonged to people who forgot they had an account at Fidelity… the ones who did nothing!
The longer investors own shares of a company, the more their investment returns will reflect that of the underlying business. Moreover, returns will be less affected by our biggest enemy: our emotions. After all, business values don’t fluctuate every second like their respective stock quotes.
Invest, don’t trade. Own businesses and leave the stock renting to the speculators.
Related articles:
The Problem with Rentals – A few weeks ago we discussed how renting versus owning relates to management teams.