Buy and Hold is Dead

By Bob O'Brien

A couple of weeks ago I wrote an article asking the question “Is Buy and Hold Investing Dead?” And I got an over whelming response. Most people said “Yes, buy and hold is dead”.

Regardless of your opinion on this, things are going to be different moving forward. The way people look at their finances has changed. In the years to come, the world economy… investing… financial planning… will never be the same.

First of all, “Buy and Hold is Dead” because it was never really born to begin with. It is really just a huge misunderstanding. It was never meant to be interpreted as buy and go to sleep.

Great investors like Warren Buffet, who are “buy and hold” investors, never turned their back to the market, an industry or a company!

“Buy and Hold” was a phrase for promoting patience with an investment. Somehow this patience turned into a nap, and then a big sleep for many investors. Before we knew it, we had two generations of investors that just threw their money at the market with no real strategy at all!

In addition, this is not a buy and hold stock market right now. It appears that the market has established a base and may have bottomed, but as I stated in my previous article there will be no quick recovery and it may be long time before we see the (SPY) S & P 500 at 1500 net of future inflation.

We are probably going to see a reflationary recovery. In fact, many people can see the next recession after the one that we are in now.

When you have an economic mess this bad, the only thing that Treasury and Fed can do is print as much money as they can, and then deal with the side effects later.

This is going to lead to heavy inflation, which is better than deflation, but then the inflation is going to have to be managed and the Fed will raise rates like they did in the early 80’s just to get inflation under control. This will be when the next recession emerges.

The new economy is not going to allow companies to get “too big”.

If they do become too big, they are going to be heavily regulated… and therefore there will be more challenges for them to become successful. The more success, the more regulated. All in all, this makes for a very different environment as an investor.

In conclusion, I feel that we are going to see the stock market have gains going forward, but there is going to be a another big pullback in a couple years when the Fed is forced to raise interest rates in order to curb inflation.

Original article

Comments

[robert99:]

That's what I do, and it's working pretty well so far.


On Apr 03 03:18 PM old folkdancer wrote:

> How about buy a low debt company you understand with positive cash
> flow, competent management and watching it and the factors impacting
> it?

Apr 03 09:59 PM

[Vox Rationalis:]

"In fact, many people can see the next recession after the one that we are in now."

Yeah. Sure they can.

"When you have an economic mess this bad, the only thing that Treasury and Fed can do is print as much money as they can, and then deal with the side effects later."

The only thing, eh? Do you read the papers? The government can't target solutions at all? Can't pump money directly into the banks? Can't replace the banks in abandoned credit markets, such as commercial paper? Can't provide liquidity worldwide as needed to keep foreign currencies afloat? Can't support certain credit markets by taking certain types of loans as collateral? Can't support state and local governments through grants?

"This is going to lead to heavy inflation, which is better than deflation, but then the inflation is going to have to be managed and the Fed will raise rates like they did in the early 80’s just to get inflation under control. This will be when the next recession emerges."

There are so many people with so little understanding spouting things like this. Have you even thought about the mechanisms here? What is going to cause inflation? The St. Louis Fed's measure of the monetary base has DOUBLED since September - meanwhile, prices are DOWN more than 2%. Isn't it clear yet that the monetary system isn't functioning in historically typical ways? How, exactly, are we going to have inflation? It'll happen when the money multiplier moves back toward the historical norm. The banks will start lending some of their excess reserves, which increased from less than $2 billion in August to nearly $800 billion in January. And will the Fed know when this happens? Yes, because virtually all of this money is on deposit at the Fed.

For some reason, people think that it's very easy for the Fed to create money, and very hard for it to then un-create it. People, people: it's the exact same process. The Fed is buying securities that are amongst the most liquid in the world. Where is the difficulty going to be in selling them?

"The new economy is not going to allow companies to get “too big”. If they do become too big, they are going to be heavily regulated… and therefore there will be more challenges for them to become successful. The more success, the more regulated."

Nonsense. First off, the only firms they're talking about are those whose failure would entail systemic risk to the financial system. Nobody's talking about MSFT. Nobody's talking about XOM. Nobody's talking about WMT, ATT, JNJ, or even GE or BRK. How many do you think there are? I can't think of a dozen.

"All in all, this makes for a very different environment as an investor."

Why? Don't you think maybe, just maybe, investors would note that the competitors of the "too large to fail" would take advantage of any increased opportunities? Could it possibly be that market-wide, the impact would be a wash?

"...there is going to be a another big pullback in a couple years when the Fed is forced to raise interest rates in order to curb inflation."

1. Just as the Fed has expanded its balance sheet since it lowered rates to zero, so will it be able to reduce it before needing to raise rates.

2. We should be so lucky to have an economy where monetary policy needs to be tightened.

3. In some number of years, there will be another recession. And another. And another. Shall I cower in a corner for all time, waiting for a placid investing environment?

Apr 03 11:08 PM

[y3115y:]

Thanks for telling us that buy and hold is dead. This is a very reliable indicator for the market bottom. It is the market top if everyone is long.

Apr 04 09:00 AM

[Dave Shafer:]

You missed the key component to buy and hold strategies. It has been aimed at equity mutual fund investors who purchase mutual funds without any particular knowledge or active participation in their investments. This was the way it was sold; dollar cost average into a mutual fund and it will be there for you when you retire! Buy and hold for individual stocks with active participation; reading financials, thinking about the products/ strategies, watching debt ratio's, noting income/cash flow, etc. is as viable as it always was.
If you mean buy and hold mutual funds is dead, I agree with you, but that wasn't much of a strategy to begin with!

Apr 04 11:27 AM

[Rob Viglione:]

The scary thing is that the Fed's ability to "raise rates like they did in the 80's" is becoming increasingly handicapped with every new dollar of short-term debt the Treasury puts on its books.

Transitioning to mainly short-term financing in the Clinton era turned the Treasury's balance sheet into the biggest adjustable-rate mortgage in history. With debt service requirements already stretching an overstretched federal budget, it is not possible for rates to float much higher before bankrupting the entire system.

Looks like we have government in a position of checkmate: tinyurl.com/c8ycx3

This article is more true than when I wrote it earlier in the year.

Apr 04 01:57 PM

[pacman1947:]

We may have stagflation as well. No economic recovery with high inflation, high unemployment, high interest rates, and as Reagan once said, the "highest misery index on record."

The market may go up, down, or sideways in such a scenario, The sure bet is that misery would be the rule if this happens.

Apr 04 02:17 PM

[notsosmart:]

due diligence & homework? how is that possible with lying ceo's & self serving boards?ethics & transparency are gone. accounting rules manipulated to fit the moment. a useless sec.double talking politicians.its all ponzi & vegas & i take credit for calling it that years ago when the rising tide lifted all boats.i was right-sadly.

Apr 04 02:18 PM

[Mutual Fund...:]

re: notsosmart comment.

Couldn't agree more. Add financial advisors and analysts to that list. These are the boys who should have a handle on possible economic and market fluctuations prior to severe down turns etc. but clearly they don't. It would appear the best advice they can come up with is make sure you are invested in gic's-bonds-savings accts-cash and perhaps a small % into large cap equities.

They assure you that if and when market conditons deteriorate your portfolio won't take a severe beating. Of course they fail to inform you that during a favorable bull markets any gains within your portfolio will be miniscule.

I believe being invested in sectors of the market that are doing well in any economic climate is the way to go. Thats my investment stategy and it works.

Doug T.......The mutual fund guy
www.mutualfundwealth.com/

Apr 04 03:01 PM

[fredissy:]

Buy and Hold has always been dead. The advent of the "Efficient Market Hypothesis" breathed life into the idea, and the zombie walked. The zombie (Mutual Funds) have been feasting on the flesh of average investors ever since. Not only do most of them underperform on a nominal value basis, but when you consider the effects of persistent dollar destruction (inflation), virtually all of them are under water in real terms of value. This is hardly any way for the average person to save for a future purpose. There are two ways to succeed: Know what W.Buffett knows, and have the money to back up your play. or, Find a good trend following service and, once discovered, stick with the plan. Check us out.

Apr 04 03:14 PM

[raising4dau...:]

Thanks for another statement on the death of buy-and-hold investing. Were you around to write the "Death of Stock" headline for Business Week in 1982 as well?

Market timing (in any market, not just stocks) is the fool's game.

I'll stick with my 45% US equities, 15% foreign equities, 15% US bonds, 5% foreign bonds, 10% commodities and real estate, and 10% cash portfolio for long-term money. It's been rough since early 2007, but I've been buying a lot of bargains since then.

Twenty years from now, I expect to be able to retire with a big pile, even without SSI.

Apr 04 04:54 PM

[kirkf:]

Sorry I disagree with some of the comments. I think that what is happening today is definetly going to lead to a high inflation environment.

Lets call "quantitative easing" exactly what it is. Printing money.

The only difference between this time and the previous ones is we dont even bother to run the printing press any more, we just do an electronic transfer.

At least running the printing presses would have created a few jobs..



Kirk

Apr 04 07:10 PM

[YoYoMama:]

The statement "Buy and Hold Is Dead" is inherently false. If you buy and hold even for 2 hours, you are still "holding" for those two hours. EVERYONE holds a stock for a certain length of time, whether that be for a few hours, days, or decades.

I agree that active management is best right now, and will be for the foreseeable future. Mark my words, though...once the next bull market hits, you'll stop seeing these hyperbolic "Buy and Hold is Dead" articles. They'll simply not be as fashionable as they are now.

Apr 04 07:13 PM

[mediapro:]

I guess that it's the fun of the game motivating stock pickers with the latest "system".

The audacity of the human mind to assume that there is a foolproof, part-time, or any other system to time entrance in and out of stocks can easily be proved wrong with just a bit of effort through historical analysis.

I still keep Burton Malkiel's words in my head. "A Random Walk Down Wall Street" doesn't guess at how the market works. It demonstrates the futility of trying to read squiggly lines, heads and shoulders, or any other green eye shade mumbo-jumbo. Technical analysis is as laughable as the Laffer Curve.

It demonstrates the only investment strategy that has a long-term chance in a market so unfathomable that even the smartest cookies throughout history eventually got crushed --- a balanced portfolio, dollar-cost averaging, and a risk spread across various investment vehicles.

Keep ignoring the dependability and sustainability of a balanced portfolio filled with broad (ETF or Mutual) indexes of stocks, laddered bonds, real estate, and maybe even a little precious metal at your own peril.

I know that this advice won't resonate on a site fueled by financial testosterone-laden geniouses, but it doesn't hurt to remind the occassional reader who might actually be fooled into thinking that someone like this author and his ditto-heads has something new to offer.

Apr 04 11:17 PM

[Conan the B...:]

Buy and Hold is alive but not as well as it used to be.

There was "diversify, diversify, diversify" and you can "Put all of your eggs in one Basket but you have to watch that basket very, very carefully."

Buy and Hold does not mean Forget About It.

Apr 05 01:43 AM

[friar tuck:]

conan's got it right.

Apr 05 12:04 PM

[Mayascribe:]

Buy and hold is dead? As an aggresive home day trader (compiling stocks to go long with) I look back at stocks I owned last November and December, and even as recently as the beginning of March, and bang my forehead and cuss myself as to why I did not hold onto them, rather trading them for a quick 10% or 20% gain, as the CNBC "Fast Money" chatterheads reccommend. Now, many of these stocks are up over 100%! Fortunately, and thanks to the contrarianism in me, I did not bail on all stocks purchased back then, and retain a few that are up over 100%.

Besides, what does buy and hold mean? We all understand the buy part, but the hold part should come with a mathematical handle, as in, "Hold + 1," would mean buy and hold for one year, or "Hold + 5," would mean buy and hold for five years. This could help redefine the buy and hold-for-how-long-do-I... dilemna that I'm guessing many investors including myself are mysified by these "Buy and Hold is Dead!" Fast Money panelists (remember, they are day traders and covet volatility!).

I also believe if an investor would view holding as a business cycle, than the investor would have a much clearer understanding of what the model for holding would be. Business cycles can come twice a year, as in AG stocks, or much longer in run-up bubble cycles such as we have just witnessed in the housing market bubble.

Another thing I have recently done is sign up for news released at the corporate websites of every stock that I am long on, such as GE (GE), Wells Fargo (WFC), Jaguar Mining (JAG), Exide, Corp. (XIDE). Other than GE, all above stocks mentioned I own and are up in the 80 to 120% range. The only one I am considering at all of selling is a little bit of JAG, to maybe up my positions of more stock in Teck Cominco (TCK) and ATP Oil and Gas (ATPG), both of which I already own shares that are way, way up.

As I look at my portfolio I KNOW that buy and hold is most definitely NOT DEAD! Remember, even with this latest 20 to 25% gain in the S & P 500, it is still way down from last October. There will be pull backs, there will be a bumpy ride here until at least the end of next year. But one thing I'm most cetainly positive about, is that if you "Buy" on the next pullback and "Hold +1.5" you'll be way ahead of the game.

Apr 05 04:22 PM

[bobrien@myw...:]

Well said Alex... too ,many buy and go to sleepers out there!


On Apr 03 05:03 PM Alex Filonov wrote:

> I am not a proponent of buy and hold. I think any stock should be
> researched before you buy and after you bought it. And if initial
> reasons for buying are not longer valid, sell. And you need to research
> your holding all the time. And take profits when they are obviously
> oversized, no matter how much do you like the stock.
>
> But, funny enough, buy and hold might come back soon. Once market
> reached the bottom (maybe already, or sometimes later), buy and hold
> will be a viable strategy again, for more than a decade. Just look
> at what happened between July 1932 and 1955 and then well into 1960s.
> Of course, if you do your homework, do research and choose right,
> you'll beat buy and hold any time.

Apr 06 03:27 PM

[bobrien@myw...:]

II am sorry Media, but you need to go deeper than that! You do not fly on a plane that has been experiencing some engine problems just because there is a low probability of any plane crashing!

But as long as you are balanced and re-balancing you are not buying and holding!


On Apr 04 11:17 PM mediapro wrote:

> I guess that it's the fun of the game motivating stock pickers with
> the latest "system".
>
> The audacity of the human mind to assume that there is a foolproof,
> part-time, or any other system to time entrance in and out of stocks
> can easily be proved wrong with just a bit of effort through historical
> analysis.
>
> I still keep Burton Malkiel's words in my head. "A Random Walk Down
> Wall Street" doesn't guess at how the market works. It demonstrates
> the futility of trying to read squiggly lines, heads and shoulders,
> or any other green eye shade mumbo-jumbo. Technical analysis is as
> laughable as the Laffer Curve.
>
> It demonstrates the only investment strategy that has a long-term
> chance in a market so unfathomable that even the smartest cookies
> throughout history eventually got crushed --- a balanced portfolio,
> dollar-cost averaging, and a risk spread across various investment
> vehicles.
>
> Keep ignoring the dependability and sustainability of a balanced
> portfolio filled with broad (ETF or Mutual) indexes of stocks, laddered
> bonds, real estate, and maybe even a little precious metal at your
> own peril.
>
> I know that this advice won't resonate on a site fueled by financial
> testosterone-laden geniouses, but it doesn't hurt to remind the occassional
> reader who might actually be fooled into thinking that someone like
> this author and his ditto-heads has something new to offer.

Apr 06 04:01 PM

[bobrien@myw...:]

R4D,

If you are rebalancing those asset classes you are not Buying and Holding!

Thanks for the comments!


On Apr 04 04:54 PM raising4daughters wrote:

> Thanks for another statement on the death of buy-and-hold investing.
> Were you around to write the "Death of Stock" headline for Business
> Week in 1982 as well?
>
> Market timing (in any market, not just stocks) is the fool's game.
>
>
> I'll stick with my 45% US equities, 15% foreign equities, 15% US
> bonds, 5% foreign bonds, 10% commodities and real estate, and 10%
> cash portfolio for long-term money. It's been rough since early 2007,
> but I've been buying a lot of bargains since then.
>
> Twenty years from now, I expect to be able to retire with a big pile,
> even without SSI.

Apr 06 05:44 PM

[mediapro:]

Thanks for the clarification, but as other posters have pointed out, "buy and hold" is a slippery term (1 minute, and hour, a lifetime?)

I don't think that you missed the point of my post. There's a difference between those who think that they are bright enough to pick individual stocks (trading or investing) and Malkiel's point that no individual can ever have sufficient information (how bad is that airplane engine anyway?) to correctly predict the movement of individual companies.

I'm sure as an investment professional that you understand the historical evidence presented by Malkiel. His and my point is that the safest route for anyone is to invest in broad index portfolios (the Wilshire 5000 ), bonds, real estate if possible, and, yes, to balance these portfolios over time.

Even Malkiel recognized that his advice runs counter to human nature, so he allows for those who wish to use real dollars as "play money"; at least don't fall into the technical analysis trap. Use due dillegence and fundamental analysis if you must.


On Apr 06 04:01 PM [e-mail] wrote:

> II am sorry Media, but you need to go deeper than that! You do
> not fly on a plane that has been experiencing some engine problems
> just because there is a low probability of any plane crashing!
>
>
> But as long as you are balanced and re-balancing you are not buying
> and holding!

Apr 06 06:51 PM