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Strategies & Market Trends : Value Investing
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To: Ron Bower who wrote (3402)3/2/1998 12:45:00 PM
From: Honest Abe  Read Replies (3) of 78628
 
Ron,

Buy and Hold vs. Short Term (Fund)

Once again, tax advantages and historical track record. But some won't give enough weight to Warren Buffet, so I'll just give an example with numbers:

Even in a buy and hold time frame as short as two years:

If an investor is in the 36% tax bracket, and trades short term (holding period less than a year) he will have to make 15% a year pre-tax to match the two-year buy and holder's return of only 11.87% pre-tax. The buy and holder can have a 21% reduction of return, yet after taxes net the same amount.

That leaves a pretty large margin of error for the buy and hold advocate. With the track records I have seen, I don't believe there is a valid argument for ANY performance penalty for a buy and holder (see my previous post re: TXN).

So, if you give the 'trader' and the 'buy and holder' both 15% pre-tax returns, the buy and holder is ahead of the trader by 5.68% assuming a short two year time frame. Extend the time frame to 5 or 10 years and the results are geometrically higher.
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