Learn to invest with Buffett

Chapter 57

Chapter 9 Section 2 Holding time determines the probability of income
My favorite time to own a stock is forever.

--Warren Buffett
Investors are divided into two groups: one group is short-term, that is, short-term holding.Sell ​​if you earn some, and sell if you lose some.The short-term focus is on stock trading, fast in and fast out, earning fast money, even though it is small money, but the accumulation of small money becomes big.The other school is long-term, that is, long-term holding.Earn some in the short term and don't sell it, in order to make big money in the long term.Don't sell short-term losses, and look at the long-term rise in the future.What the long-term pays attention to is covering stocks, slow in and slow out, earning slow money, but earning big money.
Buffett believes that holding time determines the probability of income. He believes that a short-term trading mistake requires three successful stock transactions to make up for it.Short-term trading is like flipping a coin, and the probability of the price of the next stock transaction going up or down is almost exactly the same.The profit probability of holding for three months is only 60%, and after deducting commissions and stamp duties, it is only about 50%, which is equivalent to nothing.

If you have an initial capital of 10 yuan, if you trade 100 times within a year, based on a 50% probability, half of them will make a profit of 500 yuan per transaction, which means that the other half will suffer 500 yuan per transaction. dollar loss.In this case, by the end of the year, your profit will be zero.If your commission fee (50 yuan) for each transaction (buying and selling) is included, then your capital will actually lose 1 yuan at the end of the year.Even if 100% of your 60 trades are profitable, you are still on the verge of losing money.If you want to get a 10% return, it requires 70% of your transactions to be profitable. If you are a bit ambitious and want to achieve an annual return of 20%, you must have 80% of the transactions All are guaranteed to make a profit.

But it's not impossible to achieve 70% or 80% yield, which requires abandoning short-term transactions and making full use of the value of time.The following two charts show the changes in the stock price of the S&P 1989 Index from 1999 to 500.The premise here is that the investment is random, which means that investors randomly select a company from the S&P 10 every day for 500 years.The comparison of the two figures below shows that the time of holding stocks determines the income that investors may get, or "probability of income".

Probability of winning (for one month)

Probability of winning (for 5 years)
Judging from the comparison of the above two figures, the shorter the time of holding stocks, the more random the rate of return will be. In the case of holding stocks for one month, the returns will show a high degree of randomness and unpredictability. The success of the transaction The rate is very low, plus the existence of transaction costs, your funds will suffer losses.However, when the general market is good, for example, the stock prices of 80% of the S&P 500 companies rise.If you are lucky enough to seize this opportunity, you will get a high profit.If you encounter a situation where the prices of most stocks fall, your ability to choose stocks is not important at this time, because no matter what stocks you choose, you will inevitably lose money.However, if you look at the second picture, if the holding time is 5 years, then your probability of success will reach more than 80%.

Buffett has an aversion to short-term trading.To him, this waste of money usually results in less returns for investors.What's more, this kind of behavior can cause serious inconsistency in stock pricing, which leads to irrational behavior of investors and breeds one-sided understanding of the stock market. "Only rational shareholders can form a stable and rational stock price." In 1988, he wrote in a letter to fund shareholders.Viewed as a whole, stock market trading is like a giant water pump for the economic system that pulls money out of production and into finance.

Buffett once half-jokingly said that the U.S. government should impose a 100% tax on capital transactions held for less than a year. "Most of our investments should be held for many years, and investment decisions should be based on the company's earnings over the period, not on the daily fluctuations in the company's stock price." He told the "Omaha World-Herald" more than 20 years ago. Like owning a company and focusing too much on short-term fluctuations in the company's stock price, I think it's just as weird to only pay attention to the company's recent earnings when buying shares."

Another important reason why Buffett adopts long-term holdings is to minimize the payment of capital gains tax and maximize long-term after-tax returns.Almost all investors are subject to capital gains tax.But capital gains tax is only payable if you sell the stock for more than what you paid for it in the past.Therefore, whether to pay capital gains tax is optional for investors.Investors can either choose to sell the stock and pay capital gains tax on the profit, or they can choose not to sell the stock and pay no tax.Due to the existence of capital taxation, investors need to consider taxation within the cost of investment and pursue the maximization of after-tax returns.

Investment motto:

In fact, the 1-month holding strategy has a less than 50% trade success rate.This probability may make you a big winner in the casino, but it is doomed to failure in the stock market.Because if only half of all your short-term investments are profitable, you are likely to lose all of your money in the long-term due to commissions and transaction fees.Short-term speculative trading loses its aura.People have fully understood that dice are only for fun and that you will never make money rolling them.However, relying on time can greatly increase your profit probability, why not do it?

(End of this chapter)