Risk Depends On Holding Period*
ACTUAL RISK IN BUSINESS DEPENDS ON THE HOLDING PERIOD
“Staying power”, the length of time you hold onto your investment, plays a critical (perhaps most critical) role in the actual risk you assume from that investment.
In some cases a shorter holding period may be more suitable to maximize the return on a particular investment – like “flipping” in the IPO market.
However, generally the longer you hold onto a superior business the larger will be the reward and the lower will be the risk – assuming you buy in at a sensible price.
This can be explained by paraphrasing Buffett in a lecture he gave to MBA grads back in 1995, “In the stock market it is very easy to know what will happen, but almost impossible to know when something will happen.”
Therefore, if you know something great will become of an enterprise (some time in the future) you can diminish risk in the investment substantially by sticking with it long enough (several years) to allow the wonderful even to play out.
There are obviously tax advantages to holding onto a business longer as well.
“Staying power”, the length of time you hold onto your investment, plays a critical (perhaps most critical) role in the actual risk you assume from that investment.
In some cases a shorter holding period may be more suitable to maximize the return on a particular investment – like “flipping” in the IPO market.
However, generally the longer you hold onto a superior business the larger will be the reward and the lower will be the risk – assuming you buy in at a sensible price.
This can be explained by paraphrasing Buffett in a lecture he gave to MBA grads back in 1995, “In the stock market it is very easy to know what will happen, but almost impossible to know when something will happen.”
Therefore, if you know something great will become of an enterprise (some time in the future) you can diminish risk in the investment substantially by sticking with it long enough (several years) to allow the wonderful even to play out.
There are obviously tax advantages to holding onto a business longer as well.
*David Dreman, "Contrarian Investment Strategies in the Next Generation"
posted by Raphael Blogger at
10:59 PM
