Thursday, October 28, 2010

An ironic and very interesting tidbit from GlobeInvestorGold

Long-term investing is not so long

David Berman

14:38 EST Thursday, Oct 28, 2010

Barry Ritholtz, at The Big Picture, tackled a peculiarly interesting investing statistic that I hadn't actually seen before, and found it to be false. But even as a wrong stat, it is still indicative of a trend: 70 per cent of all trading volume is due to high-frequency trading by computers, and the average holding period is 11 seconds.

Mr. Ritholtz wanted some backup evidence, and found that the 11-second holding period is nothing more than an estimate – or worse, a guess. Still, it does get you wondering...whether the actual number is 24 seconds, or three-and-a-half minutes or four days. The fact of the matter is that holding periods, whether we’re talking about computers, professional money managers or regular Joes and Janes, is steadily falling.

Mr. Ritholtz quotes a recent article by David Hunkar, at, to show what is going on: “Based on the [New York Stock Exchange] index data, the mean duration of holding period by U.S. investors was around seven years in 1940. This stayed the same for the next 35 years. The average holding period had fallen to under two years by the time of the 1987 crash. By the turn of the century it had fallen to below one year. It was around seven months by 2007.”

Those numbers take all investors into account, so presumably the holding periods for high-frequency traders would be considerably shorter than seven months.

If long-term investing is generally a good thing – at least for smaller investors – then this trend is a problem if we measure our commitment to long-term investing by how we stack up against the average. In other words, if your average holding period is above seven months, then congratulations, you are a long-term investor. But by the standards of the 1940s through to the 1970s, most of us would look like high-frequency traders.

This interesting tidbit is from:

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