Kelley Wright is the chief investment officer and portfolio manager of IQ Trends Private Client Asset Management and the managing editor of the Investment Quality Trends newsletter. He entered the industry in 1984 as a stockbroker; first at a private investment boutique and later at a major NYSE wire house. In 1990, Mr. Wright left the sell side of the industry for private investment management and has served as chief investment officer for three money management firms.
Kelley Wright explains here why holding your investments for the right time is so important, and explains one way to gauge it.
Today we're joined by Kelley Wright to talk about the best holding time frames for your investments. Kelley, should investors, when they buy a stock, be also thinking about when they want to exit to take their profits?
I think that you should know approximately where your exit point is when you enter. Now, for many people that is subjective.
We use dividend yield patterns. We collect a lot of data on stocks that meet the criteria for us, and what we're looking for is repetitive patterns of high and low dividend yield. We buy when the yield is high, we sell when the yield is low, so our entry point is kind of predefined by a certain area of dividend yield.
And we'll sit and wait for however long it takes for the price to go up and the yield to decline to that repetitive area where nobody's really interested in the stock anymore. So it depends on the stock. Some cycle fast, some cycle slow, and it all depends on the particular company.
But it sounds like the important point is that an investor should have a plan.
Oh yeah. Oh yeah. It's not, "OK, let me buy XYZ, and then what?"
You should know, No. 1, that when you're buying XYZ in the first place, that you've done some kind of value identification. There's something about XYZ at that point where you go, "That's it, now's when I want to own it." Well, if you feel that strong and firm about it, I would say that it is equally important. You better have that
Now it's time to leave and get out of here. For us, we use dividend yield. Other investors may use different things. But yeah, you don't go into something open-ended. You have to have an idea.
Let me put it this way: I would say that most money managers and most investors have definitive buy disciplines. Very few have well-defined sell disciplines. So then, that's where they get into trouble, which is do I need to stay here? Is there still more return left? What's the risk-reward? What do I do? And then you get paralysis from analysis. So yeah, have an idea of when you want to get out.
Now, how does this strategy play out differently with different market caps?
That's a great question. We don't particularly care about capitalization. What we really care about, though, is liquidity, a sufficient float. I never want to have to make an appointment to buy or sell a stock. If I want to get in, I want to be able to get in, and if I want to get out.
But that being said, with great big mega blue chips, I mean, there's a monster flow. So you don't really have to worry about that. Also, that being said, the really big monster mega blue chips are generally owned a lot by institutions, and they will tend to typically hold them for a long time.
If you look at my universe and you plot it on the old-fashioned bell curve, for example, our median hold for us is about three and a half years, so that means half cycles faster, and obviously half cycles longer. The smaller caps tend to cycle faster.
We see-and I don't know whether that's because they have a smaller flow, if they're younger companies and they have a different growth cycle, but yeah, there seems to be a little bit of a difference there.