Below is a write up I wrote on the holding period in Small & Microcap Space:
“In 1988, Warren Buffet famously said, ‘Our favorite holding period is forever.’ This quote has become a tagline for many investors, including me. But on thinking and evaluating this quote, I find it to be misleading.
Many investors, including myself, when reading Buffett’s shareholder letters for the first time, took this quote literally. However, Mr. Buffet’s real intention was to convey the message that he intends to buy stocks he can hold forever. So, in 2016, after he got sick of people misinterpreting his statement, he said, ‘Sometimes the comments of shareholders or media imply that we will own certain stocks “forever.” It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we’re talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever.’
This makes one thing clear: in investing and in life, a person’s intention matters the most. Here’s the difference between trading and investing:
In Trading: A person’s intention is to sell the stock, while,
In Investing: a person’s intention with every purchase is to hold it.
His intention was to hold his stocks forever, but as the business or macro situation changed, he sold them, though he made good money on them (that’s a different topic). This proves what we know to be true, but don’t like to admit: all stocks have different shelf lives.
Shelf life refers to the amount of time until a commodity or food is consumable without being unfit for consumption. For example, vegetables have a shelf life of 2 to 3 days, fruits 5 to 7 days, milk 1 to 2 days, and pickles 1 to 1.5 years.
Just like food, every stock or investment in your portfolio has a shelf life. The difference between food and stocks is that we know the shelf life of food, but with stocks, we don’t know the shelf life when we buy them. There’s no one-size-fits-all approach to estimate it as all businesses evolve differently. Some are gradual compounders, and some are momentum sprinters. This also differs from investor to investor.
Now, if I ask you to define your stock holding framework, many of us would define it with an exception rather than a norm, like: ‘I do deep research and understand different businesses and industries and identify a handful of wonderful businesses that I buy and hold forever.’ Isn’t it funny? Like Mr. Buffet, maybe only 2 out of 50 businesses you analyze would be worthy of owning for 10+ years. They are exceptions, not the norm, as not every business is in the buy-and-hold category.
We love to define our investing strategy as finding those 2 wonderful businesses, but in reality, our investing strategy depends on how we deal with the remaining 48. We can still make a lot of money on those 48 because what I realise is that finding those 2 business is also a matter in which luck plays a significant role and apart form finding those 2 business it also becomes equally important to get allocation and execution right.
But here’s the dilemma no one in the market likes to talk about: the skill of selling. It’s an admission that either your thesis is wrong or that ‘you don’t hold stocks forever.’ Admitting you are wrong means you are not perfect, and no one wants to admit that they are not perfect – though none of us are.
My intention with every purchase is to hold the stock for 5+ years, but less than 5% of the stocks meet that criteria of a wonderful business. Thinking on this line, I did an assessment of my own portfolio, and the results were quite surprising. Over the last 5-6 years, I invested in 40-50 companies and held only 3 stocks for more than 5 years. My average holding period across my stocks was 2.5 to 3 years, as I invest primarily in small and microcap companies. The natural shelf life of such companies is shorter than that of mid and large-cap businesses.
I’ve observed that in Indian Markets, for a small and microcap business, that shelf life is 4 to 10 quarters. In this part of the market, it also becomes equally important to evaluate management as small-cap investing is mainly surrounded by evaluating whether management is lucky or skillful and how long it will last.
And also, most small and microcap investors, including me, try to fit too hard into the camp of ‘buy and hold forever,’ but the shelf life of most small-cap companies is 2.5 to 3 years. I’m trying to be more aware of this issue and figuring out ways to avoid it, but I still haven’t got a proven way.”
This is my way of thinking and this may apply to only me but, I am just trying to share my thoughts and as a learner we should always endevor to develop our own thinking and though process as in life and investing borrowed skill and conviction are harmful.
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