Is Buy-and-Hold Dead? Hardly 36 comments
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Written by Dr. Declan Fallon
Lee Brodie calls the death of Buy-and-Hold based on the comments of Jeff Macke (Hattip Barry):
2008 is the year that will go down in history as the year that long term investment died as a thesis.
Jeff Macke may not be a fan, but calling the long term investment model a dead duck is absurd.
Lee suggests diversification as a solution, but diversification dilutes gains and brings you towards ETFism, then index funds, which invariably means a buy-and-hold strategy. It's not diversification or time frame that matters, it's risk management that's key. Taking money off the table is fine and dandy if your position heads into profit, but it doesn't protect you when things go against you (and frequently as was the case for many this year). It doesn't matter if you hold for minutes, hours, days, weeks, months or years - the principle for (re)action is the same.
For starters, Buy-and-Hold is not a returnless system; stocks falling under the buy-and-hold umbrella tend to be dividend payers with a history of dividend growth; growth which can produce stellar returns relative to the initial investment. The loss of a Buy-and-Hold limb (financials) was probably viewed by the good doctors to pronounce the patient dead, but the patient is still very much alive and well.
One only has to look at certain buy-and-hold favourites like Johnson and Johnson (JNJ) to see 2008 was no better or worse than prior years and this excludes the compounding dividend return:
click to enlarge
Buy-and-Hold is the safest way to own stock because it removes the whims of emotions; yes - many 401Ks were badly damaged this year, but would a more actively managed portfolio have performed better? Hmmmm.... those 'smart money' Hedge Funds are having a great 2008?
The Fast Money talking heads spout nonsense and fail to see the oppotunity presented to them - the ol' 'can't see the forest for the trees'.
One only has to look at past market collapses to see the golden opportunity it provided for buyers. The key is not to put your eggs into one basket and try and time the market; it's about applying basic strategy.
[1] Finding markets and sectors deep in 'bear market' territory (>20% decline from highs).
[2] Understanding the cyclical nature of markets; 4 year bull/bear cycles (markets take longer to go up than go down so it tends to split 5/3). October 2007 was the start of the current cyclical bear market so look to October 2010 or thereabouts to signal its end.
[3] You have x capital and y time to invest (y in this case is the number of months from now to October 2010). The amount you have available each month to invest is x/y.
[4] Screen for your favourite stocks or sector. I would look for stocks yielding 5% or higher as a starting point. Create a stocklist.
[5] Study a simple price chart for each stock; if they exhibit a modest uptrend or trading range then they are good 'buy' candidates (the former for sustained growth, the latter for future gains). You want to avoid stocks making parabolic moves as these 'darlings' are just fads (how many made great profits on the way up, only to give them back buying "pullbacks" on the way down?)
[6] Once your positions are filled, then you can calculate your average cost. Apply a 10-15% stop loss (adjusted quarterly) on the entire position and let the compounding begin.
[7] As long as people keep making babies (new consumers) there will always be room for buy-and-hold.
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This article has 36 comments:
Or, like somebody said, don't confuse bull market with genius.
However, it cannot be done as a stand alone investment strategy. One must hedge, also depending on where you invest, there are currency hedges that must be put on.
Almost any market outside the US (well maybe except for Europe) offers such great opportunity, especially Canada (one of the most fiscally responsible country's out there)
Lets use a productive adult generation: 30 years.
The answer to this question: Depends what period and what crisis you believe us to be in:
If you think we're re-anacting either 1929 or Japan style depression, you want to know that Japan Nikkei stock index is now back to 25 years ago, *INCLUDING* survivorship bias. (so actual losses would've been higher if you bought the index 25 years ago)
You can still buy and hold, but you'll have to justify to me why hold 25+ years is better than say strictly saving in TIPS, bonds or CDs for 25 years.
If you believe we're in 2001, 1989 or even 1974; then this is a great time to buy and hold it until the crisis is over. It'll be over no more than 3-5 years, and you'll be the envy of your neighborhood.
If you believe this is a black swan event, then I cannot advise you and any answer you pick is most likely a gamble. In that case, maybe you should also include Vegas as one investment strategy?
Finally, if this is the end of civilization as we know it, I would buy and hold bullets, guns, seeds and eggs; but mostly bullets.
The problem is most people (especially amateurs and know nothing do it yourself investors) don't have the time or know how to actively manage there money. This is where buy and hope...I mean hold comes in.
The biggest arguement against buy and hold: After the high of 1929 it took approximately 19 years for the market to return to the same level of value. Anybody want to wait around 19 years to get there money back?
This year the market dropped 40% as I previously pointed out. In order to break even the market must gain a return of +66.67%. If the market continues to return the average 11% it has over the last 30 years then it will take somewhere between 4-6 years of normal compounded returns to get it all back.
On the other hand my 10% loss will require me to gaina mere +11.11%, or a 1 year standard historical market return to get it all back. Even if I sat out or missed the first 20% of market return off the bottom I will still be breakeven or better by the time buy and holders have 25-30% still to recoup.
I of course have no intention of missing the first 20%. Following a very disciplined approach will help me get in at decent prices just like it helped me get out at good ones.
Best of luck to you all who subscribe to buy and hold, but I have feeling I will do much better.
www.investorsinsight.c...
look, buy and hold works in a bull market. there is no way you can expect to hold any equity in this market without a finger on a sell key.
We have nothing but shilling by Paulson, Pelosi, Bush and Frank. I think they must take turns calling in their orders in the afternoon each day to shill up the markets with their $700 billion PLUS the *missing* $2 TRILLION that they don't want to tell taxpayers and the press where it went.
Then, about an hour before the close we always have our *rumor* or *comment* quoted by CNBC or the Wall Street Journal, etc to HYPE the markets. The stock markets may be worth something WHEN and IF the U.S. Government gets their stinking fingers out of them and let the markets do their job.
To think that Bush had the guts to make the comments he did about the *free markets* yesterday when he and his pals have caused more interference in 60 days than have been done in the history of our nation.
Oh!
Here is a good comment from a Bloomberg interview for today to remember from Paulson (during the last hour of trading, of course):
*The S&P 500 turned positive for about 15 minutes in the final hour of trading today after Treasury Secretary Henry Paulson told CNBC the government's $700 billion rescue package is enough to stem the financial crisis.*
Crackpots.
On Nov 14 06:35 PM Morg wrote:
> Intelligent active management will always beat buy and hold. Hence
> why my account is down less than 10% for the year while the market
> is somewhere in the 40% range (depending where you look). The trick
> is getting out intelligently and unemotionally and getting back in
> intelligently and unemotionally. I just started putting money back
> into the market (about 20%) in various assets and if the market continues
> to improve I will gradually add more (somewhat of a DCA process like
> Bricki descriped).
>
> The problem is most people (especially amateurs and know nothing
> do it yourself investors) don't have the time or know how to actively
> manage there money. This is where buy and hope...I mean hold comes
> in.
>
> The biggest arguement against buy and hold: After the high of 1929
> it took approximately 19 years for the market to return to the same
> level of value. Anybody want to wait around 19 years to get there
> money back?
>
> This year the market dropped 40% as I previously pointed out. In
> order to break even the market must gain a return of +66.67%. If
> the market continues to return the average 11% it has over the last
> 30 years then it will take somewhere between 4-6 years of normal
> compounded returns to get it all back.
>
> On the other hand my 10% loss will require me to gaina mere +11.11%,
> or a 1 year standard historical market return to get it all back.
> Even if I sat out or missed the first 20% of market return off the
> bottom I will still be breakeven or better by the time buy and holders
> have 25-30% still to recoup.
>
> I of course have no intention of missing the first 20%. Following
> a very disciplined approach will help me get in at decent prices
> just like it helped me get out at good ones.
>
> Best of luck to you all who subscribe to buy and hold, but I have
> feeling I will do much better.
The real problem with the market right now is shrinking demand and too much supply. Sure, hedge funds are going bust right and left and that will end sometime next year most likely. But boomers have started to pull their money out - for good in many cases as their risk appetite weakens naturally with age. The bull market from 1982 to 2000 was as much a demographic phenomenon than anything else as demand for stocks grew. Most stocks will trade down to their real value - their dividend yield as demand falls off. Everyone will be looking back and wonder why they were paying 25 times earnings for a company yielding 1.5% or nothing at all. Why not just buy a CD? Sure, the company can be purchased for an amount based on their earnings yield. But how often will that happen and how long will those earnings last before a better product/service based on new technology becomes available?
On Nov 14 10:46 PM skyflyz wrote:
> I think the declaration "The Death of Buy and Hold" coming from
> a CNBC show signals a contrary indicator of some sort. I guess we'll
> just have to wait and see.
What if I want to live off my dividend yield come that day that I retire? The stock price doesn't matter then, in fact, if the price goes down during my period of reinvesting the dividends, I buy more shares than if the price were to race back up. So I pay more attention to dividend announcements than I do the daily up and down of the share prices.
Paper losses = paper gains; they mean nothing until or unless realised.
Boot Macke off Fast Money. Terranova, Seymour, Karabell each would make a better replacement. It is obvious that Macke has a massive ego and loves to hear himself talk. He is always interrupting the others and it is easy to see that they bite their tongues to tolerate him. I don't care if he has an Ivy League degree and can make obtuse references to books and movies that I may or may not have seen. His attempts to be cute and witty and etc. are downright annoying.
www.homepricetrend.com
So for proper historical comparison, check the hypothetical case of a person buying stocks a year after any previous crisis and see how he/she did. He would invariably be a winner. Based on this, a buyer entering market today (better 3-6 months from now when more bankruptcies or bailouts are done) and holding some good stocks has almost nothing to lose. And will definitely do better than day traders in this excessively volatile market over the next 4-5 years. Though I agree some smart traders will do well too but that's more risky.
Buy and hold is among the best strategies for next period of 4-5 years, though stcok selection and country/asset allocation would be important factors.
So different periods have different strategies suitable for them. However, except for obvious cases such as of the present, suitable strategies are known only in retrospect to most people.
On Nov 14 10:27 PM investor88 wrote:
> The strategy must suit the occassion. Buy and Hold, trading, etc
> are all good strategies at certain periods, the strategies must be
> changed to suit the circumstances. There is just no one strategy
> that is superior to all others at ALL times.
How can it helps me if I have 90% into stocks that crash 50% and then I buy 10% at 50% discount ? Is this economic thinking ? I think not...
Buy & Hold is just for a multi-year uptrend, but have all eyes on market when times change.
If you DRIP, you DCA to even stronger advantage during bear markets.
You have writien a good article but the title is misleading.
Yout hypothesis is that buy and hold investing is valid in most markets. You then describe an investment process that is definitely not buy and hold.
Specifically, you limit downside by using standing stop-loss orders. If you are selling (stopped out) you are not holding!
That said, your investment process is sound and similar to one that I use. One note: instead of adjusting stop losses quarterly, you can use a trailing stop loss with a wider margin to take advantage of sudden moves-up. You suggest 10-15% stop loss; with trailing stop loss that should be widened, to say 15-20% to reduce whip-lash losses. If the primary purpose of the portfolio is dividend income, stop losses can be even wider, say up to 25%.
AND IN A BULL MARKET.
THOSE THAT TERLL YOU OTHERWISE ARE MUTULA FUNDS THEY MAKE MONEY IN A BULL MARKET AND THE INVESTORS THEY WIPED OUT IN MANY UINSTANCES.
AS A DAY TRADER I MADE IN 8 MONTHS $150,000 MY BIGGEST LOSSES WERE ON MY BUY AND HOLD STOCKS.
GOOD EXAMPLE IN A 8 MONTHS PERIOD APPLE REACHED $202 HIGH
NOW $90.00 IF YOU SOLD IN A BEAR MARKET WHEN THE STOCK HAD REACHED $179 AND WENT INTO CASH YOU COULD BUY APPLE
AGAIN WHEN THE ECONOM,Y START TO IMPROVE AND HOLD.
IF YOU HAD SOLD ALL OF YOUR HOLDING WHEN THE DOW FROM 14000 WENT TO THE LEVEL OF 13000 AND STAYED IN CASH YOU COULD HAVE TAKEN YOUR CASH AND BUY BACK THE SAME STOCKS.
SOME EXCEPTIONAL INVESTMENT MANAGERS DO NOT BUY AND HOLD. THEY PERFORM ALL SORTS OF CHANGES IN THEIR PORTFOLIO.
JOSEPH FOSTER
IF YOU WERE IN EQUITY AND SIGNS OF RECESSION BEGAN TO APPEAR BY THE TIME THE DOW WENT FROM 14000 TO 13000
YOU SHOULD HAVE SOLD AND REMAINED IN CASH UNTIL SIGNE OF RECOVERY BEGINS TO APPEAR.
EXAMPLE HIGH QUALITY COMPANY PAYING DINIDEND WAS $60.00
NOW $20.00 WITH ALL OF THE DIVIDEND REINCESTED IF YOU ARE LUCKY PERHAPS IN 7 YEARS OR LONGER THAT STOCK MAY GO BACK TO $60.00 FOR A PERID OF 7 YEARS YOU ARE BACK TO WHERE YOU STARTED.
Instead of a new bull market starting in October 2010, past market cycle averages would indicate a new bull market at least by October, 2009.
Stock Market Declines
The U.S. stock market peak in this cycle could be defined as October 2007
On average, the U.S. stock market peak to trough is 22 months in length.
U.S. stock market bottoming process: has been 3-8 months in length since 1970.
The total time spent in bear markets has been 31% of the last 107 years.
Since 1953 the S&P stock market index bottomed 4.1 months prior to recession trough.
Recessions
It is likely the U.S. Gov't will declare that a recession began in April/May 2008.
Historically, the length of recessions have been:
17 months in length since 1854
14.4 months since 1902 - Average stock market decline -24.2%
22 months since 1929
10.2 months since 1945 - Average stock market decline 34%
During a couple of bear stock markets, no recessions were ever declared - not likely now.
Stock Market Recoveries
Stocks and sectors provide some leadership- solid sales and earning growth and the stocks are traded well
U.S. stock Bull markets (from trough/bottom to stock market peak) have averaged 30 months in length since 1900/
There have been three long bull markets that lasted 9 years, 10 years, and 15 years 8 months
An average gain of 106% for all bull cycles
An average gain of 46% after one year from the recession trough.
Don't tell me buy and hold is dead. The funny thing about this is you can do the same thing today with BP.
Sounds great, very logical, prudent. But what guarantee is there that these companies will be able to continue to pay 5% or more? So is the reduction of dividend a sell sign?
Just think how much those in "insured" cash have made by protecting principal while benefitting from the "miracle of compound interest."
Over the last year, a minimum of 30%, up to 50-60%, in protected principal + compound interest, and when in state bonds, the addition of tax savings of about 40% to 44% on interest depending on individual state income tax. Hmmm. Looks good, unless the rush from gambling is worth the losses of those who bought into the "think long" and be "diversified" mantra the talking heads are paid to throw at us daily.
If you folks are willing to think in 10-year periods, think real estate and rents and appreciation and tax breaks galore. Get out there and pick up a few repos, especially duplexes and triplexes, and you will be very well off 10 years from now. If you play the market, you might as well go to Vegas or your local Indian casino, and play black and red on roulette, and play the 2-1 line, and don't forget to cover the house numbers with a 11-1 play. And there is no additional commission. But stay away from the poker tables where there are professionals working with partners. The poker tables are a lot like the stock market. LOL.
I am not going to do the math here. (though I have done it, and it is SCARY!!) As you do the math consider the taxes they have to pay each year as they sell some stock. Consider also the destruction of the value of their portfolio year after year by this country's inflation policy. Consider, as you do this, the REAL inflation, not the lies we are told. Finally, consider the two major hits to the general market we have now experienced in the period of 8 years. Can you spell.....ruined? I do have a solution to this......and, it is not Buy And Hope!!
peace,
Scorpio
On Nov 14 05:38 PM bricki wrote:
> Buy and hold obviously is poor during a secular bear market. But
> how about dollar cost averaging? It seems to me that would work very
> well.
>
Scorpio
On Nov 15 05:32 PM User 10755 wrote:
> Would anyone buy and hold (at these levels) the SPY or DIA leaps
> exchange traded funds until October 2010 ???
knol.google.com/k/easa...#
An investor who invested in 2007 with strategy of buy and hold has surely lost a lot. So buy and hold was a bad strategy then.
but as I said in the last comment, suitable strategies are better known only in retrospect barring a few times like the present.
For me buy and hold means buy and hold 'medium to long term' (atleast 1-3 years). The extent to which prices are down right now or will be down in 3-6 months time, the strategy is bound to be a winner (even if the prices don't come back to the levels they were in 2007) . So it seems a good strategy for the present times.
You don't need a lot of analysis to know that every recession ends and when it ends equities and all other asset classes generally move up. No arcane anaysis or 'expert' advice is required to guess that odds are most likely to favour a 'buy and hold' investor (I amend may be fresh money or investor).
I agree it is a simple view and things might be different this time as many indicators are pointing to unprecendented level of turmoil. But it does seem a safer and less complicated bet right now.
On Nov 15 06:20 AM Roowns wrote:
> Kaizen, why take the current prices in consideration when buy &
> hold does not imply sell and most of the time you have all value
> in stocks.
> How can it helps me if I have 90% into stocks that crash 50% and
> then I buy 10% at 50% discount ? Is this economic thinking ? I think
> not...
> Buy & Hold is just for a multi-year uptrend, but have all eyes
> on market when times change.
From what I've seen, people who timed the tech bubble right didn't get this year's plunge right, and vice versa. If you got both right, Morg, more power to you. If not, well ...
On Nov 14 06:35 PM Morg wrote:
> Intelligent active management will always beat buy and hold. Hence
> why my account is down less than 10% for the year while the market
> is somewhere in the 40% range (depending where you look). The trick
> is getting out intelligently and unemotionally and getting back in
> intelligently and unemotionally. I just started putting money back
> into the market (about 20%) in various assets and if the market continues
> to improve I will gradually add more (somewhat of a DCA process like
> Bricki descriped).
>
> The problem is most people (especially amateurs and know nothing
> do it yourself investors) don't have the time or know how to actively
> manage there money. This is where buy and hope...I mean hold comes
> in.
>
> The biggest arguement against buy and hold: After the high of 1929
> it took approximately 19 years for the market to return to the same
> level of value. Anybody want to wait around 19 years to get there
> money back?
>
> This year the market dropped 40% as I previously pointed out. In
> order to break even the market must gain a return of +66.67%. If
> the market continues to return the average 11% it has over the last
> 30 years then it will take somewhere between 4-6 years of normal
> compounded returns to get it all back.
>
> On the other hand my 10% loss will require me to gaina mere +11.11%,
> or a 1 year standard historical market return to get it all back.
> Even if I sat out or missed the first 20% of market return off the
> bottom I will still be breakeven or better by the time buy and holders
> have 25-30% still to recoup.
>
> I of course have no intention of missing the first 20%. Following
> a very disciplined approach will help me get in at decent prices
> just like it helped me get out at good ones.
>
> Best of luck to you all who subscribe to buy and hold, but I have
> feeling I will do much better.