Is 'Buy and Hold' Investing Dead?

by Bob O'Brien

I really wish I could agree with those that have said that this economy will not be that bad, and I actually sympathize with leadership in striking a balance between not “talking down” the economy and yet preparing people for the economic reality. When Captain Sully Sullivan landed that Airbus plane on the Hudson River a month ago, he said “Brace Yourself for Impact”.

There will be no “V”

In case you are not familiar, this is shape of some recoveries in markets. They hit a bottom and then they bounce back up and the market looks like a “V”.

This was the case with stocks in the 2000-02 market when the market hit a bottom and then bounced back up. Unfortunately this will not be the case this time with the market. We have probably not found the bottom yet and when we do, we will probably just bounce along on that bottom for a while.

S&P 500 Double Tops, then Crashes!

Many people fail to realize that the 1929 crash was not the final blow that lead to the depression. In fact, the market rallied in the early 30’s, but then sunk to even greater lows. It was only after this in which there was a prolonged bear market. You can see there was a half of “V”, before the real major losses (click on chart to enlarge).

Here are the reasons why there will be no “V”... No earnings…

In order to have a robust stock market you need strong earnings, and there will only be a fraction of the companies that are profitable like (WMT) Wal- mart, (MCD) McDonalds and other consumer staples. Just a few companies like these cannot carry the entire market.

It is important for the 401k and broad based market investor to understand that you are not just investing in the stock market, but you are investing in the earnings of all these companies that make up the market!

Another wave of bad mortgages… Alt A loans will be the new sub-prime for 2009. Check out this article in regards to the alt-a loans. This is going to beat up the banks even further, and may bring down some big insurance companies like The Hartford (HIG), Principal (PFG) and Lincoln (LNC).

Continued drops in Real Estate… Even if the residential real estate market does stabilize, the commercial real estate market is looking worse and worse. Many of the real bubble areas have come down significantly like California and South Florida. But there is still a lot of room for decreases in the Northeast and other parts of the country that did not get so out of control.

There will be no “V” for the real estate market either.

We are all getting too accustomed to bad news… The fact that the Commerce dept. revised its #’s and that the economy actually shrunk 6.2% in the 4th quarter as opposed 3.8% should be major news. It was not because people are tired of hearing all the negative news. The market has also been down over 20% year to date and most people don’t seem to have a clue.

Consumers will continue to cut back… This is really a positive for the long run, but for the short run this is a negative. This is the first consumer-based economy, and will probably be the last! The American consumer wants to be prosperous and is realizing fast that you cannot borrow and spend your way to prosperity.

The Lack of margined/leveraged investors/credit… This is the type of investing that usually pumps up the market, and all these types of investors have been burned real bad and couldn’t get credit to buy stock even if they wanted to.

The good news is that we will survive this horrible economy, and no one will go without the basic necessities.

It has often been said that it is times like these in which there is room for great leaps in growth! There’s nothing like a crisis to make people get on their toes!

Comments

[Prudent Man...:]

If the country remains upon being a "service economy", services that are easily replicated as proved by the foolish use of derivatives internationally, our importance as an economic engine will decline as well as our standard of living. This just didn't start eighteen months ago but decades ago. We must start producing goods as well as services.

As things stand today, the attitude of those in the most "productive" age groups is one of entitlement rather than responsibility. To change these attitudes will take decades unless things get so bad economically, which will make our military defenses (current budget decreased) tested, that the generation that will be responsible for paying for the decades of government waste will become more responsible politically and economically. A good start would enact the Line Item Veto and enact a Term Limit Amendment for Congress, both of which would change the short-term thinking in government today.

No entity can continue to survive by squandering wealth that has not or may not ever be earned.

Mar 03 01:41 PM

[winslow:]

We can have a "V" recovery, or a "W" recovery, or an "L" recovery, ete, etc. It doesn't matter. We won't know what it is until after the fact. The one thing that will probably be true: the US will no longer be the same. This social experiment with capitalism and free enterprise is proving not to be what we had believed. People in other parts of the world now have the proof that our priniciples are not as "great" as we had purported.

Mar 03 02:52 PM

[Loose Change:]

I read an interesting article regarding the dichotomy between "buy-and-hold" investing and "market timing" strategies Sunday (link below) suggesting that market bottoms are found where the overwhelming sentiment amongst advisers is that "buy and hold" is dead. It is exactly when "market timing" becomes the prevailing and dominant ideology that you can tell that markets may be on a turning point.

Conversely, "buy and hold" strategies become most ragingly popular at market tops. This occurs shortly before price decline in equities and equity indices.

Interesting questions to pose, especially with consideration to the major differences between the current market downturn and previous ones of the last thirty years.

www.marketwatch.com/ne...

Mar 03 04:46 PM

[Paulo:]

Bye and Holed

Mar 03 08:29 PM

[who:]

Buy and hold is not dead for bullish markets. Since we are in bearish market its sell and hold.

Mar 03 09:28 PM

[sickofthehype:]

yes

Mar 03 11:52 PM

[kelm:]

Buy and hold never meant "buy and forget" or "buy and don't think" yet that is what the majority of investors did and Wall Street got lulled into the same mindset. It is great if you can identify a stock with a long term future, buy it, keep it in your portfolio forever. That is what Buffet does - usually. That is what others like Jim Rogers like to do. BUT, they do not stop re-evaluating the assumptions that led them to that buy and when conditions change they change the portfolio. Unfortunately, that last step, which requires constant information assimilation and processing, was left off of most investors checklists.

Mar 04 09:50 AM

[bobrien@myw...:]

Thanks for the comments PM, we have definitely got some issues!


On Mar 03 01:41 PM Prudent Man CFA wrote:

> If the country remains upon being a "service economy", services that
> are easily replicated as proved by the foolish use of derivatives
> internationally, our importance as an economic engine will decline
> as well as our standard of living. This just didn't start eighteen
> months ago but decades ago. We must start producing goods as well
> as services.
>
> As things stand today, the attitude of those in the most "productive"
> age groups is one of entitlement rather than responsibility. To change
> these attitudes will take decades unless things get so bad economically,
> which will make our military defenses (current budget decreased)
> tested, that the generation that will be responsible for paying for
> the decades of government waste will become more responsible politically
> and economically. A good start would enact the Line Item Veto and
> enact a Term Limit Amendment for Congress, both of which would change
> the short-term thinking in government today.
>
> No entity can continue to survive by squandering wealth that has
> not or may not ever be earned.

Mar 04 10:12 AM

[bobrien@myw...:]

Awesome point! It was the big Mutual Funds, and the personal finance people that “oversimplified” a strategy like “Buy and Hold” . The message in the nineties was: Put your money in the market and forget about it!


On Mar 04 09:50 AM kelm wrote:

> Buy and hold never meant "buy and forget" or "buy and don't think"
> yet that is what the majority of investors did and Wall Street got
> lulled into the same mindset. It is great if you can identify a stock
> with a long term future, buy it, keep it in your portfolio forever.
> That is what Buffet does - usually. That is what others like Jim
> Rogers like to do. BUT, they do not stop re-evaluating the assumptions
> that led them to that buy and when conditions change they change
> the portfolio. Unfortunately, that last step, which requires constant
> information assimilation and processing, was left off of most investors
> checklists.

Mar 04 10:18 AM

[User 369371:]

The simplest way to assess the value of buy and hold is to examine the long-term results of its greatest practitioner Warren Buffet. After 40 years of tireless efforts, value and moat theories, and buying great companies during one of the biggest and longest bull markets in history (1974-200 for SP500), Mr. Buffet's portfolio is at best FLAT.

Mar 04 10:36 AM

[BigOlDave:]

Is 'Buy and Hold' Investing Dead?

Short answer: YES !

Mar 04 10:31 PM

[Madacasto:]

I'm surprised that there's no mention of the prevalence of shorting stocks and the facilitation provided by technology - via online brokerages. Consider how drastically different investing is now, as opposed to even 5 years ago, because of the internet. Quick money has an impact on the psychology of novice investors, and so does the prospect of losing money. I believe this has a very strong impact on investment styles and the lack of the buy and hold strategy we see in today's marketplace.

Mar 17 09:53 AM