Should We Marry Our Stocks?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The title of this might make you think I'm about to don a tin foil hat and start preaching that stocks are a sentient alien race... but that's not going to happen. I'm done with that phase of my life, and now I'm a bit more lucid. What I'm actually pondering is whether the term of ownership a person should pursue for their stocks should be long or short.
According to some data, the average holding period by an investor on the New York Stock Exchange is only 7 months. By contrast, in 1940 that holding period was an average of 7 years. The same economic cycles occurred in those days as happen now. There has always been a cycle of booms and busts, bears and bulls. I have to admit, I'm curious why so many terms for the stock market's movements begin with a B.
The amount of time some investors hold their stock holdings is less than a day. After all, it's unlikely that the term "day-trading" would have been invented if it were not a popular strategy among investors. But is flipping shares of Microsoft (NASDAQ: MSFT) really the best way to make your holdings grow? Warren Buffett doesn't seem to think so, and he's pretty good. Keep in mind that Microsoft is making steady strides into the portable market despite Zune's general failure, and Bing is a hungry competitor for Google's core business model, to say nothing of its continuing high profit margins and tiny amounts of long-term debt.
Okay, he's really good. But even Buffett has a long list of mistakes he'll solemnly own up to that make him feel a little slow. Is his typical habit of holding shares of companies like American Express (NYSE: AXP) or Moody's (NYSE: MCO) for extremely long time horizons, possibly forever, actually a good idea? Consider that AmEx is one of the world's largest credit card processors and has notes receivable that even the Chinese government would respect. You might also consider the fact that our entire society's lending structure is based off of the ratings that companies like Moody's produce, and it has a specialized legal status that provides a powerful moat.
Considering that Buffett has trounced the S&P 500 for decades on end, it would appear that his strategy has some merit to it. However, you and I are not Warren Buffett, and many of us have never even paid as much for a house as one share of Berkshire Hathaway (NYSE: BRK-A) costs. With Berkshire's ownership of the entire Burlington Northern railroad, Geico's dominant position in the property and casualty insurance industry and the company's stake in Coca-Cola and Ford, the likelihood that anything short of the apocalypse could stop the company is pretty low. The rules might not be the same for every investor, even though we all share the same market.
You might also want to consider the fact that despite the enormous amounts of capital appreciation, Buffett makes his money through fees and paying himself a salary at Berkshire. While some investors prefer to receive cash dividends and get paid regardless of whether they ever sell, other investors will only realize a profit if they sell. This poses a quandary I'm having trouble answering.
When I buy a share of stock, I intend to own it for the foreseeable future. If I bought a few shares of a pharmaceutical company, it wouldn't be because a hot new drug was just cleared by the FDA. If I bought some shares of a tech company, it wouldn't be because the idea sounded interesting. This just sounds like an action partaken in by someone who hopes that they aren't the most hardcore speculator on the block.
If an individual owns shares of a company that does not pay a dividend, does it make any sense not to sell if the price becomes what he or she considers "overvalued" or grants a reasonable profit over their purchase price? I would enjoy using this post as the start of a debate on the topic, if anyone has an opinion on how long to hold and when to fold.
The reason I buy shares of companies is so I can receive dividends. Without a dividend, I can only scratch my head pondering whether the shares will go up or down. While some people most likely enjoy the thrill of watching their stocks constantly and selling at just the right moment, I'd much rather just let my stocks pay me and skip the worry and brokerage fees. I guess you could say I choose to marry my stocks. If that's not how you roll, leave a comment below on how long you like to hold and why.
pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Moody's and Microsoft and has the following options: short OCT 2012 $55.00 puts on American Express Company, short OCT 2012 $60.00 calls on American Express Company, and long OCT 2012 $65.00 calls on American Express Company. Motley Fool newsletter services recommend American Express Company, Microsoft, and Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.