If you're using the fat-pitch approach, you won't need to trade very often because you'll hold only wide-moat companies. By definition, a wide-moat company has long-term advantages and creates shareholder value year-in and year-out. Because a wide-moat firm creates value each year, its fair value tends to increase over time. These are the only types of stocks in which a buy-and-hold strategy works well, because the odds are in your favor that the actual underlying value will continue increasing over time. As we mentioned earlier, when you buy a company with no moat, you are making a bet that it will bounce up just long enough for you to sell it.
Think of it this way: Investing is nothing more than a game of probabilities. No matter how diligent you are, your fair value estimate for a stock will never be exactly right. It's really just an estimate of what a stock is worth under the most likely scenario for future earnings growth and profitability. Thus, there's always less than a 100% probability that you'll be right about a stock pick. Given that the odds are below 100%, there's little point in trading from one stock to another frequently; your odds of being "right" on the new pick are probably only a little higher than the odds of being wrong on the current pick.
Add to this the costs of trading--including taxes, bid-ask spreads, and commissions--and the odds of generating higher returns by trading frequently are worse than simply buying great stocks at good prices and holding them for three years or more.
The Bottom Line >>