Warren Buffett has often compared investing to baseball: It's far more profitable to wait for the fat pitch and then invest big. But unlike baseball, investing comes with one advantage: There are no called strikes. Investors can wait and wait until Mr. Market throws them the perfect pitch before they decide to invest big.
Unfortunately, many investors think they have three strikes and feel the need to be buying and selling something all the time. No matter how you examine it, more activity in the stock market generally leads to poorer results.
Huge advantages to doing nothing
There are many advantages to making a few sound, sizeable investments and just sitting back and waiting.
- You pay fewer brokers' commissions.
- You'll hear a lot less nonsense from everybody and anybody eager to give you sales pitches.
- And if your investments work -- odds are in your favor they will -- the government will let you keep more of them for every year they are compounded over and over again.
A simple mathematical example illustrates that last point. If you buy something that compounds at 15% per annum for 30 years, and you pay a 35% tax at the end of those 30 years, after taxes you keep about 13.3% of that compound rate.
In contrast, if you bought the same investment and had to pay 35% in taxes each year on the 15% you earned, your net return would be about 9.75% per year compounded.
By doing nothing you earned a spread of more than 3%. How significant is 3%? Mutual-fund legend John Bogle discovered that 85% of mutual funds lag the S&P 500 Index after all fees and expenses. Bogle also found that only 0.5% of all mutual funds beat the indices by more than 3%.
Load up on opportunities
It's easy to talk about the benefits of long-term holding; it's a whole different ball game to put the philosophy to use. Only truly fantastic companies allow you the luxury of sitting on stocks for 10 years or more. Such opportunities are rare, and you're making a big mistake if you don't back up the truck when you find one.
Buffett is often quoted as saying, "We invest as if the stock market could shut down for years," and "My favorite holding period is forever." Over time Buffett has bought and sold stocks he held for relatively short periods, but Berkshire Hathaway's (NYSE: BRK-A ) best and most profitable investments have been around for decades.
Buffett's partner Charlie Munger often remarks that Berkshire is what it is today because of 10 or so big investments. Among them are GEICO, (Buffett calls it the best investment he ever made), the Washington Post (NYSE: WPO ) , American Express (NYSE: AXP ) , See's Candies, Coca-Cola (NYSE: KO ) , and Procter and Gamble (NYSE: PG ) subsidiary Gillette. Without these and a few others, Berkshire would not be the fortress it is. And in each of these investments Buffett invested big, sometimes buying the whole business outright.
Great companies don't always mean great investments
Of course there can be flaws to buying a great company and sitting back. If you remember the "Nifty 50" days, the premiere growth stocks were known to everyone and got bid up to over 50 times earnings, as IBM (NYSE: IBM ) did. And when IBM came sliding down, the others followed. As always, you have to be mindful of risk.
Yet in the long run, the buy-and-hold-for-a-long-time approach seems the best way to reap tremendous returns. So when in doubt, it's best to sit on your assets.
For further Foolishness: