Even the most devoted long-term investors may feel the urge to indulge in market timing -- especially when they look at all the things that might go wrong for the business environment down the road. But should they?
In this mailbag segment of the Market Foolery podcast, host Chris Hill and senior analyst Ron Gross take a question on that topic from listener Ryan, who has enjoyed how the first-half rebound has buffed up his portfolio. He's heard that if you've made a 15% profit on a stock, that's a good time to bank some of your winnings. Hang on there, replies value investor Gross -- that's not the way to think about this. Here's how you should.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
This video was recorded on July 1, 2019.
Chris Hill: Question from Ryan Merkel, Staten Island, New York. Ryan writes, "I'm a new investor, love the podcast and the services you provide through Stock Advisor and Rule Breakers. With the market doing really well since Christmas Eve, 2018, a trade war hovering over us, slowdown in the economy, and in my opinion, an uncertain future economy, is it a good time to take some profit? I've heard that once you hit 15% profit, you should take some off the table. I'm a long-term investor, but what does the term long-term really mean? Any guidance would be greatly appreciated."
I'm curious about the number he wrote. You hear all manner of things, but I've heard investors say, "If I make 50% profit" or -- this is my father in law's move, and it's worked out well for him, I should say -- if he doubles his money with a stock, he'll sell half and roll with the rest and redeploy the cash in another way. Do you have any guidelines that you live by? I know you're a valuation guy.
Ron Gross: Yeah, that's what I live and die by, so I don't have a standard number. A company could go up 15% but have another 100% to go over the next five years. I want to be all in there, I don't want to start paring it back. So, for me, it's looking at each individual company and assessing, is this too big of a position, is the valuation stretched such that I probably won't earn the rate of return that I want to earn, especially relative to the market? And if that happens, then I'll pare back. But there's no standard like, "Oh, 15%, time to pull back." That's just not how I think about stocks.
Hill: In terms of long-term investing -- to Ryan's question -- how do you think about long-term? I think in general here at The Motley Fool, we define long-term in a much longer time horizon than, say, the average person on Wall Street does.
Gross: I literally think about it as forever, except maybe retirement, things will change, and I'll have to change my allocation from an equity bond perspective or an equity cash perspective. But for really long periods of time. That doesn't mean I'm going to hold every single company for really long periods of time. But I'm going to remain almost fully invested for really long periods of time, and I'm not going to try to time the market and move to cash in any significant way. There are certain times where I feel things are stretched where I'll be more in cash than others. But I'm not pulling money in and out of the market. Statistics show that if you're not in the market for the best five days of any given period of time -- a year, 2 years, 5 or 10 -- you underperform unbelievably versus if you had stayed in investing. And that's only if you missed five days or so. So, I'm happy to take the ebbs and flows of the market and live through them, not try to be smarter than the market. Try to buy good companies, make good investments, but not try to be smarter than the market. Just hold on for literally decades.
Hill: Particularly if you're a new investor, like Ryan, and you're younger, it can be a little hard when you're starting out to think in terms of 10 years, 20 years, that sort of thing. But really, overwhelmingly, that's how younger investors should -- I don't know how old Ryan is, but I'm going to make the safe assumption he's younger than you and me.
Gross: [laughs] Most people are. Agreed. The only thing you have to worry about, in my opinion, is to make sure that you don't have cash in the market that you're going to need over the next two or three years. If you do that, then you can stay invested, and even if the market tanks like it did in 2008 and 2009, you can stay patient, perhaps invest more money if you have it, but just stay patient, don't pull money out, because you don't need that money. It's going to come back. It historically always has.
Hill: That's a great point! I was thinking of last week, when Dan Kline was here in the studio, we were talking about the Caesars-Eldorado merger. Dan was very clear about saying he really likes the deal and he really thinks it's going to pay off 10 years down the line. He was basically like, "Yeah, I think this is a great deal!" He ticked off all the reasons he thought it made sense. And in the next breath, he said, "The next couple of years, that's not going to show up. They're going to be spending money. They'll have to do all the things that come with a merger, including rebranding, etc. But 5, 10 years down the line, I really love this deal!"
Gross: That's awesome! I love that kind of thinking! The only caveat there is, over a 10-year period of time, its total rate of return would have to be equal to or better than the opportunity cost of what I could have put the money into elsewhere. So, it's going to have to earn me whatever it is, 8% to 10%, on average for that 10-year period, so that when I look back at it and say, "OK, that was a great investment!" If it's only earned me 20% over that 10-year period, it was probably a mistake.