Long-Term Investing Strategy Outperforms Constant Activity, Argues Michael Merlin

In a recent LinkedIn post, Michael Merlin explores the often-overlooked advantages of a long-term investment strategy, contrasting it with the perceived benefits of frequent trading. Merlin argues that sustained holding periods and a focus on minimizing costs are more crucial for wealth accumulation than constant market activity.

Merlin’s central thesis is that the true measure of investment success lies not in the volume of trades or the gross returns generated, but in the net amount retained after accounting for all associated expenses. He highlights the hidden costs that can erode an investor’s portfolio over time.

“What you keep matters more than what you make.”

The Hidden Costs of Frequent Trading

Merlin meticulously breaks down why constant trading can be detrimental to an investment portfolio. He points out that while individual fees and taxes might seem insignificant, their cumulative effect over years and decades can be substantial. This is particularly true when considering the power of compounding, which works both for and against investors.

Compounding’s Dual Nature

As Merlin notes, compounding is a powerful force that can significantly amplify returns for long-term investors. However, frequent trading disrupts this process. Each transaction incurs costs, and selling profitable investments, even if intending to reinvest, creates taxable events that reduce the principal available for future growth. Merlin emphasizes this by stating:

“Frequent buying and selling interrupts long-term growth.”

Furthermore, Merlin addresses the psychological aspect of trading. The feeling of productivity associated with frequent activity can be misleading. He argues that more trades do not necessarily equate to better results and can often lead to emotional decision-making, which is a common pitfall for investors.

Simplicity and Patience as Keys to Wealth

The post outlines several key points that support a buy-and-hold philosophy:

• Every Trade Has a Cost: Even seemingly small fees compound over time.
• Activity Can Lead to Mistakes: More trades often result in poorer decisions rather than enhanced returns.
• Taxes Impact Net Gains: Short-term trading strategies can trigger higher tax liabilities.
• Compounding Needs Time: Constant activity hinders the exponential growth potential of investments.
• Winners Can Become Liabilities: Selling winning positions creates taxable events that diminish capital.
• Small Percentages Compound: Minor costs incurred today have a magnified impact over long periods.
• Simplicity Tends to Win: Disciplined, straightforward strategies often outperform complex, frequently adjusted ones.
• Focus on After-Tax Returns: Ultimately, retaining earnings is what builds lasting wealth.

Merlin succinctly summarizes this by observing:

“Fees compound. Taxes compound. Patience compounds.”

In Merlin’s view, successful investing is less about active management and more about strategic patience. The goal is to maximize the amount of money an investor keeps, rather than just the amount they earn before expenses. He concludes by posing a question to his audience, prompting reflection on whether patience or activity has been more impactful on their own investment journeys, further underscoring his belief that sustained, disciplined approaches are paramount.