One of the many things that Warren Buffett is famous for is that his favourite holding period is “forever”.
There are several good reasons for holding onto your shares forever, such as: less brokerage costs, less taxable capital gain events and less time worrying about where to switch your money to.
However, there are few businesses that I’d want to allocate my money forever to.
Changing business models, market disrupters, cost pressures and economic cycles would make me question wanting to hold Commonwealth Bank of Australia (ASX: CBA), BHP Billiton Limited (ASX: BHP) or Woolworths Group Ltd (ASX: WOW) indefinitely.
In my mind, there are three good holding periods:
Until it reaches your valuation
Many successful fund managers spend their days calculating what they believe the current value of a share is. If a target share is sufficiently below that valuation then it’s worth buying. If it reaches the manager’s valuation then they’ll sell and move on.
It’s a methodical way of doing things and allows the manager to take a lot of emotion out of decisions. However, it requires market-beating skill to pick more winners than losers. The investment team at WAM Research Limited (ASX: WAX) are very good at this.
Until the tailwind is finished
Many shares can point to a far-off reason why its profit will grow for a long time to come. Challenger Ltd (ASX: CGF) and Ramsay Health Care Limited (ASX: RHC) can point to ageing demographics for decades to come.
Crown Resorts Ltd (ASX: CWN) is growing from rising tourist numbers and the completion of Crown Sydney should be a major boost.
At some point the tailwinds will become headwinds, or at least subside. That will mean the growth prospects are subdued.
For the foreseeable future (forever?)
If you can find a share that offers growth for theoretically a very long time then it could become a core part of your portfolio. Rising populations and growing economies point to very-long-term growth for shares like Costa Group Holdings Ltd (ASX: CGC), Rural Funds Group (ASX: RFF) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
Most of the shares that I own I hope will be good performers for many, many years into the future (not just the next year), which is close to forever compared to most other people’s holding periods.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, COSTA GRP FPO, Ramsay Health Care Limited, RURALFUNDS STAPLED, WAM Research Limited, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited, COSTA GRP FPO, Crown Resorts Limited, RURALFUNDS STAPLED, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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