Stanley Druckenmiller regrets selling his NVIDIA position too soon. He said recently that he wished he had held on to his NVIDIA shares, but admitted he’s no Warren Buffett: “I don’t own things for 10 or 20 years. I wish I was Warren Buffett.” I admire his candid confession but he’s not alone.
Just the other day, I was listening to Ted Seides’ podcast Capital Allocators. He had Jonathan Tepper on, who is the CIO of Prevatt Capital. He co-wrote an interesting and thought-provoking book, The Myth of Capitalism, in 2018. In the podcast, he mentioned in passing that he admired his brother who holds on to stocks for up to 20 years, but he admitted he’s himself not that long term.
This is generally the case for most professional fund managers. Morningstar reports that portfolio turnover ratio of US-based large value funds averages at 58% (i.e. 58% of holdings are sold or replaced in a given year). This means that they typically hold a stock position for less than two years at a time. Global large stock funds are at 37%, meaning they hold stocks for less than three years. In fact, annual turnover ratio of 20% or less (equivalent to average five-year hold) is considered low and indicates a buy-and-hold strategy in the investment industry.
There just aren’t many fund managers that hold a position for five or more years. Why professional investors can’t seem have appetite to hold their stocks for the real long term? By the real long term, I mean ten years or longer.
I can think of some reasons why this is the case:
Managers need to justify their holdings every quarter/year to their investors/LPs.
They report their fund’s performance every quarter, or at least once a year. If a stock is not keeping up with the market, it could feel like a burden to them. It’s hard to justify a stock’s underperformance every year to your investors. One is tempted to just get rid of that eyesore before publishing the next report and just move on, rather than keep apologizing for it.
Think about the businesses that cut dividends in the immediate aftermath of Covid in 2020. Like Disney (DIS) and Simon Property (SPG). These theme park and mall owners didn’t know how long the enforced shutdown would last. How many fund managers would just sell their positions and move capital to other businesses with better near-term prospects? Back in November 2020, I wrote about my Disney, Simon, and other holdings who had just cut dividends. Simon only just restored its dividend fully to the pre-pandemic level after gradually increasing it every year since 2021.
Managers worry about keeping up with other fund managers.
Beating an index’s performance is generally the goal but it’s not disastrous to their career progress even if they fail to do so. So long as they stay close to their peer funds’ performances.
This is what Jeremy Grantham calls their career risk:
Professional investors pay ruthless attention to what other investors in general are doing. The great majority ‘go with the flow,’ either completely or partially.
- From Grantham, 2012 letter
Warren Buffett calls it the institutional imperative:
The tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.
- From 1990 letter
If a particular stock becomes unpopular with the larger investment community, chances are that all fund managers will be loath to carry it. It works the same way with stocks that become too popular. Everyone wants to hold a position in them. (Like NVidia today.)
Managers need to show activity every quarter.
If all they do is just hold on to their stock positions year after year with little or no activity, investors start questioning their value add to the funds. Why am I paying this manager when I could just buy the same stocks and hold on to them?
Managers tend to be overconfident in their own abilities to pick big winners year after year.
There is an interesting research paper from Hendrik Bessembinder that I recently came across. His research shows that just a little more than 4% of all publicly traded firms accounted for all the wealth creation in the US stock market since 1926. All the remaining firms’ combined return barely matched 1-month Treasury bills’ performance over that period.
This chart, taken from his paper, shows the total wealth creation by all publicly traded companies for the period 1926 — 2016. Just the top 1,100 firms (out of 25,332 firms that were public during those 90 years) generated all the excess returns.
The point that this research makes evident is that there are very few true long-term wealth generators to be found in the stock market.
It’s hard enough to find one long-term winner in the market, let alone find new winners every few years. And yet professional investors often attempt to do just that; let go of their winners in the quest of finding new ones.
Along the same lines, Brookfield (BN, BAM) CEO, Bruce Flatt, had this to say in recent 3Q shareholder letter:
The value of long-term investing is often underappreciated by investors as it is often exhilarating to buy and sell things; a short-term gain always feels like one has been successful. However, the constant churn of assets causes tax friction and can sometimes result in an investment in a business that is in fact inferior to the one you had.
Where these professional investors fail, we, the individual or small investors, have an opportunity to shine.
Joel Greenblatt in his eminently readable gem-of-a-book The Big Secret For The Small Investors made this point eloquently:
As individual investors, we have some major advantages over the large institutions.We don’t have to answer to clients. We don’t have to provide daily or monthly returns. We don’t have to worry about staying in business. We just have to set up rules ahead of time that help us stay with our plan over the long term. We have to choose an allocation to stocks that is appropriate for our individual circumstances and then stick with it.
Individual investors like us can do things differently:
- We don’t report to other investors, so we don’t need to justify our holdings, cull those that are lagging the market, or worry about investors pulling their capital out. We just need to have confidence in our investing strategy and stay patient. In 2019, I wrote a blog post on how I keep my long-term investing outlook.
- We can just ignore other investors and not compare ourselves with peers because we can’t be fired. We have no career risk. Howard Marks pointed out once (see this: Investor Anxiety) that Warren Buffett has two advantages over fund managers: permanent capital and job security.
- No one is paying us for investing on their behalf. We have no need to show activity to justify our roles. 2023 was that kind of year for me where there wasn’t much investing activity that I undertook.
- And perhaps most importantly, if we have a big winner in our portfolio, we don’t need to let go of it. We don’t have to compulsively try to find new winners every year and discard old ones. In a 2020 blog post (Buy right, sell never), I shared my thoughts on keeping stocks for a decade and longer.
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