At the heart of the The Motley Fool philosophy sits the idea that short-term investing and market timing are a great way to cost yourself a fortune over time. In this segment of this Rule Breaker Investing podcast, David Gardner pulls out a much-repeated line from his brother, Fool CEO Tom Gardner, on the subject of how long your investment-holding period should be.
A full transcript follows the video.
This video was recorded on Aug. 16, 2017.
David Gardner: Quotation No. 2:. This one is an investing quotation. I mentioned it earlier. I foreshadowed there will be at least one great investing quotation this week, and this one comes from my brother Tom. This is one of my favorite lines from my brother. I've heard him say it innumerable times. He's right. You might have heard it. If you're a longtime Motley Fool fan you may have heard this from Tom's lips, but if you haven't, I want to make sure you know it. Here it is.
"Whatever your holding period, double it, and you'll be a more successful investor."
"Whatever your holding period." I know some people who will hold stocks a matter of a few days. I think that if they held it for a few weeks they'd probably do better. I know people who hold stocks for a few months. If they would just hold for a year.
By the way, when you do hold for a year and a day, you're going to get, if you made money, a lower tax rate. It's called the long-term capital gains tax rate, of around 15% or so. If you sell a stock inside of one year, you're going to pay your normal income tax rate for that short-term gain. I'm glad that the U.S. government has set things up that way.
I'm sure all of us would like our taxes to be lower, regardless of what form taxes take, and I think that's been true throughout history. But I'll say this: 15% is one of the lower rates you can find, and it's pretty darn awesome for people like you and me -- Fools, Rule Breakers all -- who think in three-plus year increments, because the good news is you're going to do better by holding and extending your holding time. As my brother Tom says, you're going to do better, and you're going to pay less tax as a consequence.
Now you might think, "Well, that's almost unfair. We should change the rules. People who hold for long periods of time make a lot of money. They shouldn't get a tax break." But let's also remember the other side of that coin, which is that they're being very patient. They are forgoing the use of that capital. Anybody who is an investor has, by definition, taken a portion of what they could have spent gratifying themselves or their families in the short term. They've done something very hard. They've said, "I will not use that. I will save that. And not only that, I will risk that."
When I put money in a stock, when you put money in a stock, we have no certain benefit. So we've not only said no short-term gratification, no near-term use, but we could also -- and it happens to me all the time -- we could literally lose some, even -- this has never quite happened to me -- all of that money that we decided to invest. So yeah, I think that there should be a break for people who hold stocks for a year and a day or more.
But maybe you're used to holding three years. I think Tom might say, "Consider six." I've certainly increased my own holding terms over time, and Tom's words are a good reminder to all of us that regardless of what our time frame is, if we think even longer, he says -- I agree with him -- we think you'll do better.
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