Hi Mike: Probably the single biggest reason I believe in LTB&H is because I don't think there is a model that works in all situations. Because no situation holds forever, LTB&Hing allows the investor the necessary time to ride out the periods when a particular model or models don't work.
This is a useful way of thinking about LTB&H. There is a converse however, which implies that when in situations where specific models do apply, then having bought time with LTBH one might cash it in.
Or indeed where LTBH is provably the riskier way to achieve investment objectives.
For example, let's say we have a reasonable and ambitious long term investor whose goal is to out-perform the S&P over 20 years by a factor of two. Quantifying this [11% avg return = 8x in 20 years, 22% LT Cap Gains Tax Rate] every dollar invested in day 1 is expected to yield about $11.79 after tax some 20 years later.
Furthermore, let's say our prudent investor is also conscious of the Gorilla Game and used the methodology to select QCOM back in April '99 when it was at about $18, having doubled from prior trendline in a month... Tucked away into the long-term portfolio.
Objective: April 2019, net out with $213 a share after tax.
Not even a year later, QCOM's trading above $150 a share.
Quickly, out comes the calculator. Our intrepid investor determines that she can GUARANTEE her investment objectives. Beat them by $100 per share actually.
If she foolishly sold all for $140 and paid the tax man 22% on the gain to pocket $120, and then invested this in a tax free 5.5% government bond for the remaining 19 years... well she ends up with $313 per share. For sure. Zero risk.
As opposed to entertaining the risk that QCOM's value proposition based on technology-ransom expires somewhere between now and then. Which is to say that LTBH was without question a riskier way of meeting the stated objectives. Even forgetting about valuation.
I guess what sabotages most people's portfolios is the process of objective creep. It is very easy to enter a position with the goal of doubling one's money. But if it doubles overnight, the tendency is to hang on and see what happens.
In the case of nominal gains, the LTBH principle is key in preserving tax efficient allocation of capital.
But occasionally, and particularly in the case of spectacular gains, the principle "LTBH" is part of the value trap and needs to be viewed objectively.
Which is to say, always with the objectives in mind, and against alternatives.
John. |
