Why Your Exit Strategy Matters More Than Your Hold Period

Long holds may work for stocks but in real estate they don’t correlate with higher returns. Surprising? We thought so.

Returns in real estate can happen quickly, or take decades, or never materialize, but it’s easy to think that a good exit opportunity will appear even if a hold period is longer than expected. The basis for that optimism about the future may be flawed, however. To explain why, we need to have a drink, or seven.

Imagine you are dropped in the middle of a grassy field. And you’re very drunk. You start walking - stumbling? - with no destination, and where you end up walking is random. Now imagine the same scenario, except the field is on a slight slant, higher at one end and lower at the other. You start walking again, but this time, odds are you’re going to go downhill over time.

This illustrates the difference between two concepts: a Random Walk vs. a Random Walk with Drift (RWD). The RWD model underlies many investment strategies, especially long-term holds. We assume - because it’s been true over time - that most stock prices have unpredictable short-term fluctuations (the “walk”) with an overall upward trend over time (the “drift”).

The longer you hold an asset in a RWD world, the more it reflects broader market trends, which themselves are driven by generally positive economic growth, so the greater your expected return on that asset. This may have been what Warren Buffet had in mind when he said about well-run businesses, “Our favorite holding period is forever.”

Well, maybe it’s good The Oracle was not a big real estate investor. Researcher Jacob Sagi’s new work tells us individual real estate investments defy this logic and real estate returns are independent of the holding period.²