The Average Stockholder Invests for 8 Months (Part 1)
The average stock investor holds for just 8 months. This is not acceptable – how are we going to harness the long term power of compounding returns when we can’t even hold for a year? Let’s break this down by reviewing the study that brought this to our attention. We’ll take a look at two market darlings (AMZN and MSFT) and see just how hard it would have been to hold these for 20 and 30 years. In Part Two of this article we’ll review Warren Buffett holding GEICO stock since 1951 for an example of how to hold stock. Then we’ll finish up reviewing strategies on how to hold stock for so long.
The Study that Shocks
I was absolutely shocked to come across this study that shows in 2016 the average stock investor holds for 8 months – 8.3 months to be exact: Average Stock Holding Period on NYSE 1929 To 2016. Here’s the graph followed by the summary of the findings.
- Doesn’t include high frequency trading
- Includes retail investors, fund managers and professional traders
- During the 50’s equity investors focused on dividends and held on longer
- Latest focus on capital growth, share buybacks, low cost brokerages, easy access to trading platforms, and information are blamed as the main culprits
Honestly we have to do better. Long-term stock holding is the only real answer for investing success. I know its hard to do and we’ll cover some examples of how hard it would have been to hold Amazon and Microsoft through the last 20 to 30 years. In Part 2 we’ll review one of the best examples of holding stock for the long term and then we’ll finish up with some tips on how to be a better long term investor.
Long term stock holding is a critical skill and characteristic of any successful investor. We cover this in our Four Pillars of Investing Success article as one of the rock solid pillars.
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How hard would it be to hold Amazon for 20 Years? Let’s dig in and found out!
Amazon 1999 to 2020
Everyone knows Amazon and most if not all are kicking themselves for not buying it for $300 a share, or $400, $500, $800 or even $1000 a share. But what about buying it for $70.63 at the end of October 1999. Killer deal – and if you had put $10,000 into that and bought 141 shares, today you would be sitting on $500,867.25 with those same 141 shares. (Price hit $3552.25 on Sept 2, 2020)
Here is your price chart of success with a handy little arrow showing where you entered the investment.
Now this is what we all dream about: solid entry point on a 50x banger. But I would suggest the only way you would hold onto these 141 shares for 20 years is:
- You forgot you had them
- You owned or created or contributed to the company and committed to grow or die with this company come thick or thin. So you’re basically Jeff Bezos
Why? Because this is the ride you’re in for:
FIRST Challenge – You get to lose nearly your entire investment:
From October 1999 to December 1999 you see some nice upward price movement, even hitting $113 a share in December. After December 1999 you don’t see a closing price above $70 until June 2007. You get to ride the biggest scare of the tech industry – the infamous Dot Com Bubble Burst While Amazon was one of the few that survived, most of it’s peers went under and their investors lost everything. Do you have the balls to hold these shares in the face of losing your entire $10,000?
By March of 2000, just 5 months after you bought the shares your investment is worth just $1,442.43. Then, 6 months later 9/11 happens and you reach a new low of just $5.97 a share for a value of $841.77. Who has the stomach to take these one-two punches?
SECOND Challenge – You’re under for the next 7 years:
Like I said above, you don’t get back to above $70 a share until June 2007. Then the financial crisis hits and your shares nose dive to $34.68 meaning you’re back below $5,000 by November of 2008. How do you mentally handle this roller coaster?
THIRD Challenge – Your 10 year rate of return is anemic:
At the end of October 2009 your shares are back up and are trading at $118.81. Meaning your compound annual rate of return is 5.34% over the last decade. Your $10,000 investment has grown into $16,752.21. At this point you might be thinking you’ve ridden out a few major storms, held on for 10 years and maybe its time to move into these hot stock of 2009 for the next 10 years:
- American Express (NYSE: AXP), +126% in 2009
- Microsoft (NASDAQ: MSFT), +60% in 2009
- IBM (NYSE: IBM), +59% in 2009
- 3M (NYSE: MMM), +49% in 2009
- Alcoa (NYSE: AA), +47% in 2009
It’s tempting; but you have to stand there and say, “Nope, I’m in it with Amazon for another 10 years. I was just wrong by 10 years too early.”
FOURTH Challenge – You get a return! Time to sell out!
From 2009 until August 2018 you get a bull run that few have seen and less have had the pleasure of experiencing. Your shares ride northward to $2003.00 a share. Your investment is now worth $282,432. You’ve made 36.87% a year. It would not be a mistake to cash out; everyone would commend you for 19 solid years of holding on through thick and thin. But you’re going to hold this for another run.
FIFTH Challenge – The 2018 Pull Back
Remember those balls of steel you forged during the first 10 years? You will need them again because as you’re celebrating your $282,432 account you lose $100,000 in a month and you’re staring at a value of $184,287.
Now back during the first 10 years you were looking at this up and down motion with just thousands of dollars. You’re now playing with a quarter million. Do you have the stones to take a $100,000 paper loss?
LAST Challenge – COVID-19 Pandemic
You ready for something a little different? How about another market crash in the face of a worldwide pandemic takes the modern economy down to its knees? Surprisingly you’re on the right side of this crash and after taking a dip in March 2020 you rise to your ultimate value of $3552.25 on Sept 2, 2020 and you’re account value reads over $500,000 for the first time.
You’re a freaking genius!!
This is a tough ride to take for 20 years. Yes the end justifies the means, and yes you’ve beaten the average stock investor holding for just 8 months, but you had to have forgotten you had these shares in some long lost brokerage account that you bought with a Pentium desktop computer on a dial up modem.
Very few individuals can take this sort of beating and live to tell the tale. During these crashes and pull backs the moments are RAW. The emotions are REAL, the fear is TANGIBLE. Fear of LOSS is legit and it makes us do things to assuage and address the fear.
So if you sold out of Amazon during the last 20 years I totally get it.
Anyone who has held MSFT for 30 consecutive years has been made into a millionaire. But how hard has it been to hold this stock for that long? Lets dig into it.
Microsoft 1989 – 2020
If you thought the previous example with Amazon shows the powerful potential for stocks to create wealth hold onto your seat. This next one will blow your mind.
Microsoft from October 1989 until today, September 2020 – this will span 30 years and because of this and the vast history of dividends and stock splits we need to add the assumption that you invest your MSFT dividends when you get them and you’re not paying commissions. So you have a DRIP or equivalent program setup. Next we lock back historically and use adjusted closing price. This lets us account for dividend splits and dividends paid.
FIRST Challenge – The Incredible Big Bang
From October 1989 to October 1999 a $10,000 investment in Microsoft would grow into $820,532.58. When I first saw this number my jaw dropped and I thought my calculations were wrong. I double checked it here . This works out to an annual return of 55%. To put it bluntly – you feel like an investing god. It will be hard to not take some of this money off the table. How do you grow so fast and not take some away to enjoy it. Buy a car, a house or take a vacation?
SECOND Challenge – 10 Years of Sideways Nothing-ness
This is where it gets hard. During the dot com bubble crash you lose half a million and your account value was dropped to $384,433.68. Assuming you had the stones for this, next Microsoft shifts to being a value company instead of a growth company and starts paying dividends.
While this is great, you might not want this. This could be a sign to you that the growth days are over and for the next 6 years you go nowhere. MSFT just meanders along without direction and without conviction. It’s paying dividends and you have them reinvested but you feel like you’re at a bus stop waiting while other cars, or investment opportunities, are just passing you by.
By the end of the next 10 years your account value is $598,872.12. You’ve gone from feeling like a god to feeling like a senior citizen put out to pasture to die. What’s worse inflation has eaten away at your returns too. It would have been hard to not have pulled the sell button during these last 10 years.
THIRD Challenge – Crossing $1M
By mid 2012 you start to see you’re back up to that $800,000 level again. It’s going to be hard not to sell and lock in that $800,000 after your experience so far. Or how about when it crosses the magical $1,000,000 which it did on November 2013? Look you’ve had a great run, you’ve endured the plains of misery during the 2000’s and it would not be a mistake to take the $1,000,000 and run. Maybe even retire. But hold on – there is more if you could just hold on and complete your 30 year journey.
FOURTH Challenge – 30 Times Around the Sun with MSFT
You’ve done it and now your 30 year investment of $10,000 is now worth $3,515,614.25 (Sept 18, 2020) Check it here. That is life changing money. Let’s take a moment to review this.
- On October 31, 1989 you bought 121 shares of MSFT for $10,000. They were priced at 82.64 a share.
- Now you have 17,543 shares at 200.39 a share and each share pays you $2.24 a year for a yearly cash flow of $32,296.
- You get 3x your original investment back in cash each year. EACH YEAR!
All you had to do is hold hold hold for 30 years through boom times, a couple crashes, a decade of negative sideways returns, and settle in for the latest tech boom.
