There are two types of participants in the stock market: Traders and Investors.

Following the Wall Street Crash in 1929, the famous investor Gerald Loeb became disenchanted with the market as a safe haven over the long-term. He advocated a ‘cut and thrust’ investment style – jumping in and out of investments at opportune moments.

Investors such as George Soros and Victor Niederhoffer could be categorized as following a similar style, commonly referred to as ‘trading’ or ’speculating’ as opposed to investing. Players who trade over very short time frames are known as ‘Day Traders’.

On the other hand Warren Buffett, Peter Lynch, Shelby Davis or Philip Fisher are known as ‘Long-Term Buy and Hold’ investors – often abbreviated as LTBH investors.

Which style produces the best results?

In August 2013, The Wall Street Journal stated, ‘The three top spots in the Hulbert Financial Digest’s five-year rankings through June 30 of more than 200 investment-advisory services all buy and hold quality companies. Remarkably, all three are subscription newsletters published by the same advisory firm, the Motley Fool in Alexandria, Va., which was founded by brothers Tom and David Gardner in 1993’.

Many would regard the most successful investor of all time as Warren Buffett – the epitome of buy and hold investing – Buffett says that his favourite holding period is ‘forever’.

The most influential writer on investing, Peter Lynch, writes, ‘The typical winner in the Lynch portfolio generally takes three to ten years or more to play out’.

Of the dozen investors surveyed in ‘Free Capital’, six invested for the long-term (from several months to several years), five for the medium term (several months), and only one was a day trader. After three years, the author contacted the twelve investors to enquire upon their performance. Most of them continued to perform well, but the lone day trader had lost to the market.

It may be true that certain individuals, like Soros, have an instinct for trading, buy you are just as likely to find that you have the talent to become a great tennis star or a Formula One driver as you are to discover that you are a natural trader like Soros.

It is fair to conclude that your most likely recipe for success is to follow a ‘buy and hold’ strategy.

But there is a caveat. Despite advocating holding ‘forever’ as a strategy, Buffett will often sell stocks and rotate his holdings. Lynch likes to switch in and out of positions in slow-growing companies. He writes, ‘By successfully rotating in and out of several stalwarts for modest gains, you can get the same result as you would with a single big winner’.

Shelby Davis was renowned as a long-term holder but by the mid 50s, all the names in his original portfolio were gone. He had moved on to a new set of companies that he felt comfortable holding for extended periods.

In summary, you should buy great companies and hold them for long periods – but don’t be afraid to sell when the need arises.

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