Time frames: Hare or tortoise?

When you buy a stock, think of it as buying a share in a business. You are now the proud part-owner of a business enterprise. You may have a portfolio of such investments, but that shouldn’t alter your approach. Treat each as a long-term investment.

If you own a gold stock, you are part-owner of a gold mine and should look forward to a strong gold price, especially if it is a marginal mine, rising production, and effective management of costs. If you own a share in Microsoft you would hope for increased market share as well as effective cost management.

Occasionally you may have to sell a stock because something has negatively affected the long-term prospects of the business, or because you receive a crazy offer that is way above its perceived value. But these should be exceptions rather than the general rule.

There are 3 keys to successful investment:

  1. Timing of your investment;
  2. Length of time you hold the investment;
  3. Timing of the sale.

Many investment advisers follow the adage: “It’s not timing the market that is important; it’s time in the market.”

While I agree that time in the market is important, try telling someone who invested in stocks in 2000, or 2007, that timing isn’t important. It can take up to a decade or more to restore value lost through poor market timing. So don’t tell me that it’s not important.

The green and red arrows below identify the start of bull and bear markets on the Dow Jones Industrial Average, in accordance with Dow Theory.

Dow Jones Industrial Average

Similarly, investors who sold their stock portfolio in 2002/2003 or 2008/2009 are unlikely to be happy with their performance.

At the same time, if you continually buy and sell stocks on a daily basis, you are unlikely to have much success. There are exceptions, but they are a few compared to the many. Short-term stock movements are largely random and it is difficult to find a consistent edge. On top of that, you have transaction costs that continually erode your capital.

Whether you are part-owner in a business or in real estate, you are unlikely to show much profit if you continually buy and sell your investments. In the words of a valued former client: “You need to let time do its work.”

The longer your time frame, there are two factors that work in your favor: lower transaction costs and less random market behavior. The longer the time frame, the easier it is to predict stock market direction.

Brokers Charles Schwab once did a survey of their clients to establish whether there was a particular time frame or investment strategy that yielded the best results. They found one category of client that outperformed all the others: those who had forgotten they had an account with Charles Schwab. The less activity there was on an account, the better it was likely to perform.