Why does portfolio turnover matter?

A portfolio turn rate of 25% indicates names in a portfolio are turning over once every four years.  Turnover costs money.  There is the frictional cost of transactions, tax in non-registered accounts, and the vulnerability of decision making.  Generally speaking, the fewer the decisions, the fewer the mistakes.  More often than not, the best decisions are "No" decisions - where we often accomplish more by deciding to do nothing.  Ideally we prefer to make good decisions up front so we can own a business that keeps on giving, in which case our favorite holding period is infinity!  With regards to frictional costs, we prefer a passive approach.

On the other hand, our primary objective as investors is to preserve capital so it is necessary to be aware of the vulnerability that exists when something we own has become over-priced relative to it's value.  We buy with a margin of safety, at a discount to the intrinsic value and we're prepared to wait for others to recognize the value of what we own.  When prices go up and exceed the underlying value, the opportunity for additional gains is diminished and the risk of a price correction is increased.  As a result, it becomes desirable to apply an active approach in order to preserve capital and to re-allocate our resources to where the margin of safety promises greater protection and opportunity.

Part of the human condition is to change what isn't working.  Our evolution has depended on this reflex and it has served us well.  As investors we are tormented by the urge to do something when things are not going as expected.  We have a natural proclivity to take action, any action, when in doubt.  The urge to flee from the perception of danger is deeply rooted in our DNA.  So we need to be aware of our predisposition and act accordingly.  The key is to understand what we're doing and why we're doing it.  We do not want to jump from the frying pan into the fire and we advise our clients to develop a response mechanism for periods of uncertainty to avoid costly trading mistakes.  We don't want to confuse motion with progress!