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Stock Trading - Buy And Hold, But Not Forever

Buying shares of a company and holding them for a long time, say 5 to 10 years, has its advantages and disadvantages. For individuals who are not investing on a full-time basis, the buy-and-hold strategy can be appealing. Once the shares are bought, investors need not watch the daily price fluctuations of the stock to decide whether or not to sell. More time can be spent on obtaining a better understanding of the business that they own. In addition, the buy-and-hold strategy helps with tax planning. Long-term investors benefit from lower capital gains tax rates.

Using the Five Keys of Value appropriately leads to a sound investment strategy. This philosophy of investing shows that long-term investing works best, because investors would be very confident on the business, the price paid, the events that need to occur to spur continued share price appreciation, and the downside if nothing happens. The key is having the appropriate patience and discipline to weather the down markets, while staying calm during times when the market is overheated.

One negative attribute of the buy-and-hold strategy is that your investment may be too early to benefit from any catalytic results. The longer you wait, the smaller your returns will be due to inflation. In addition, holding a company for a long time frame certainly implies that the company purchased 10 years ago is most likely a different company today. As a result, many investors consider 3 to 5 years ample time to allow companies to generate adequate returns, without a significant change in business models.

In general, I believe the buy-and-hold strategy is a good one; it is the duration that matters. Too short of a duration is more like trading, rather than investing. Holding for too long reduces real returns, and most likely changes the reasons for ownership. Business buyers in the private equity and leverage buyout game typically consider a 3- to 5-year time horizon when making an investment. The actual length of time for holding any company might be forever, if the fundamentals continue to improve year after year. However, it is important to establish a finite exit point, in order to calculate the value of a company and assess managements expectations. Therefore, one might conclude that 5 to 10 years may be too long in the modern era, and that 3 to 5 years is perhaps a more appropriate time frame for owning a stock.

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