I am a true believer in the Magic Formula. Still, there are a few things that I wish Joel Greenblatt and his compatriots would have looked into a little bit further. One such area is the holding period. In the "Little Book," Joel argues for a 1 year holding period (a few days less than 1 year for losers in your portfolio, and 1 year and a day for gainers). The 1 year holding period means that I'm going to be paying capital gains every year. I have no problem with that if I'm going to be getting the type of returns Joel outlines in his book.
However, Joel recently suggested in an interview that a 2 and/or 3 year holding period works equally well. I'm surprised Joel did not look at this in his book. All things being equal, I'm definitely going to want to hold the stock in my taxable accounts for 2 or, even better, 3 years. Then I can delay paying capital gains and put that extra money to work for me. I wish Joel would have compared the 1, 2 and 3 year holding periods. Investors could be better off going with the 3 year holding period if returns are comparable.
Any thoughts?
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3 comments:
I think you might want to check the transcript on J.G.'s lecture. I don't believe he said that 2 and 3 year holding periods worked "equally well." It was more to the effect that they also worked well, but he didn't claim equal performance.
My mistake. Thanks for clearing that up. I'd be interested to see the numbers. It obviously makes a hudge difference when dealing with a taxable account.
He has also pointed out that after one year, you've got new results, so you might as well rethink it at that point. Combining that with the tax effect is a strong argument for the 1-year holding period.
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