Give Me Three Reasons to Stay in This Market 11 comments
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It is as good as any headline looking to catch the attention of anyone who is grasping for reasons to stick to a plan that caused major financial (and psychological) pain over the past 12-months. The concept of Buy-and-Hold, the brainchild of Warren Buffett, has been bastardized by the asset gatherers who believe that it really means: buy-and-hold-no-matter-how-much-money-you-lose. (Also see Don’t buy and hold a bad strategy.)
When is it the right time to sell anyway? 10% down? 20%, 30%, 40%, or 50% ? While Warren Buffett has amassed a fortune by sticking to what he knows and believes in, he has also lost an amazing amount of money over the past 12-months. Of course I will not start to second guess his success, but should he be blindly followed by Joe Investor?
This week, MSN Strategy Lab brings the debate front and center as I reflect on the past few month’s market devastation and the process that was used to keep our Strategy Lab portfolio out of danger. Now up over 13%, I ask the question as to how anyone can just sit idle and watch profits and principal disappear.
On the heels of that commentary, Guru investor John Reese came to the defense of his unique computer driven methodology which combines the best ideas of famous investors. In his words:
They are those who have the best track records of outperforming the market over the long term — people like Warren Buffett, Peter Lynch, David Dreman, John Neff, Ben Graham and Martin Zweig. And what a lot of investors either don’t realize (or simply ignore) is that several such Wall Street greats have either written or been the subject of books that detail their stock-picking methodologies.
Many relied on quantitative, stick-to-the-numbers approaches, and I have used these proven and published techniques to develop my “Guru Strategies.” Each of these computer models mimics the method of a different investing great. During Strategy Lab, I’ll use these models exclusively to decide when to buy and sell stocks.
I like John and think he is an excellent money manager and a really smart guy. This is in no way directed at him, but his article got me thinking. It is odd that the defense of a buy-and-hold strategy always targets the fears of an investor missing the biggest days in the market and has at its root the idea that it is all-or-nothing? In other words, it appears that the assumption is that if you do not buy-and-hold, you are going to be a market timer who is looking to tactically move in and out on technical signals.
I have questions:
- Why is it that research related to being invested during the worst days is rarely presented?
- Why is it that we have been coaxed into believing that investors and advisors are too stupid to see a train wreck or rally approaching and use sensible risk management and hedging to both gain and protect a life’s savings?
- Why can’t it be as simple as admitting that chasing the S&P 500 is a fool’s game?
- If you want to be the S&P 500, then index through ETFs and call it a day. Who needs anything more if it is that simple and a downswing of 20% or even 60% does not matter?
- It always comes back…right?
It is time to question the established rules as they have caused irreparable harm to the portfolios of many investors beyond any risk tolerance assumptions that were ever considered. Frankly, a portfolio that is down 10% or even 25% in a year’s time is difficult enough to deal with; but 50% in a matter of months is something that needs to be questioned.
Do you still believe that holding on to a portfolio in all market conditions is the right way to play this game?
It is time to stand up to those that profit off of the strategy and found it acceptable to removed the word “risk management” and replaced it with “just trust that everything will work out” in an effort to rationalizing the massive amount of money lost to absolute stubbornness.
I’ll take stop-losses and hedging any day of the week….
Thoughts?
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This article has 11 comments:
I've seen many of my buy-and-hold buddies lose their shirts, but my skill hasn't been so hot with stop-losses, when those shake-out drops kick me out then continue back up, leaving me in the dust on the runs... :^)
any favorite tricks, once you've committed to your buy?
tnx,
--ikk
O the other hand, there is almost nothing to recommend the B-A-H strategy for an individual investor when dealing with new companies, service companies, makers of trendy products, followers, opportunistic companies, companies with operations in less transparent business or political environments, and such. In this case, the BAH strategy is extremely risky.
As an individual investor reviewing my 20 odd years of experience (very odd, actually), I tried both the BAH strategy as well as the market timing, or in my case, market guessing. I failed in both cases. Now I realize that I almost consistently misapplied the strategies; almost exactly the opposite way to what I believe now. I hope that this post mortem analysis will allow me to recover from the unnecessary on individual stocks.
I would say buy and hold when you lose 50% must be amended to buy and hold and if you still believe, buy more now that you lost 50%. If this question is asked before investing and one is clearly not willing to invest more if a 50% loss is taken, then the buy and hold strategy is not for him/her. Risk tolerance assessment seldom consider the capacity of the investor to invest more money despite counterperformance even if it is probably the more reliable way to get good results on very very long term.
apart from the obvious ones of low debt, good dividend cover and good casg reserves to exercise caution. Indexes always give a false impression long term since the moment a stock looks bad the powers that run the index kick it out and replace it with something that looks better. Charts only work when enough people believe in them to follow them. Otherwise they are bunkum. There is no precedent for anything in this life. Once you know that you learn much (something that lawyers don't as precedents earn them their living). So all you can do is to cherry pick. If you want big upside odds then pick the start ups and try to study a particular industry but get a spread of companies since investment and fortune is at best a percentage game. The trouble is that its the VC's that get hold of many of the cherries at ground floor level as so often regulations said to be to prevent the uninitiated are in reality designed to keep the small man out. Back your hunches. That's all you can do. Timing is important and so now with the market down 50% there are some at last. Most investing strategy is simple common sense. Don't let experts fool you. They call themselves that to justify their commissions on your dealings. That's their bread and butter and if you don't have something similar going for you to earn your living you shouldn't be investing.
Answer: Six.
Question: How many weeks in the last two months alone did the S&P's low to high range exceed 8%?
Answer: Eight, with several of the weeks actually walking the most of the range more than once in that week.
There is a recent book by Anthony Crescenzi "Investing from the Top down"
I find helpful. Not all Analysts/Strategists are blowhards.
I completely agree that common sense should be the foundation of any individual's investing strategy and that professional have their own agenda.
'Buy (near the Bottom), Hold and Sell (near the Peak)'
This should be the strategy of long, value investors.
Buy real companies with real profits.
Buying companies paying decent dividends makes the Hold period much more tolerable.
I don't think you can discount buy and hold. It is simple and the facts are it has worked out well.
Another question would be, why do you ask these questions in a downturn where it is easy to make buy and hold look bad. Sure it could take 20 years to reach 14000 again but that will have far more to do with the financial casino that has been established where everyone is just trying to squeeze yields and ALL people are just as happy to short as they are to go long.
At this times, you can either play market timing (but need the tools and the discipline) or not play at all.
Every season has its tools..