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Sorry I hide my true identity but I'm a physicist/engineer, native contrarian and idea generator. I am an eclectic dividend investor with motto "In God We Trust, All Others Pay Cash" applied to companies I invest in. I like to read /and read a lot - did you look on my SA photo 8-)? / including... More
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  • My 2 Cents On "Buy And Hold" 2 comments
    Mar 29, 2013 11:48 AM

    March 28, 2013

    Many market pundits recommend Buy and Hold strategy for stock investor and MPT proponents make investor life even more easy saying that you need Buy and Hold a wide index like S&P500. There are 2 factors that rule a typical stock index (like S&P500, Dow-Jones 30 and many others)- natural life of firms (merger, bankruptcy, etc...) and human judgment (hidden committee selects firms for S&P500 index).

    An investor can agree or disagree with the second factor but in most cases has to accept the first factor (well if investor is powerful insider /s/he can resist a merger).

    So how good "Buy and Forget" approach was for investors in the past?

    On the first glance (see graph below) it works good for equity markets in many countries:

    (click to enlarge)

    But for stock investor results are not so nice: Shocking numbers come form Jeeman Jung and Robert J. Shiller paper "Samuelson's Dictum and the Stock Market" (2005):
    "In fact, when we did a search on the Center for Research on Security Prices (Pending:CRSP) tape, we found that there were only 49 firms that appear on the tape continuously without missing information during the period of 1926 to 2001." They also note "When Poterba and Summers (1988) did a similar search of the CRSP tape, they found 82 survival firms during the 1926-85 period. The smaller number here apparently reflects the continuing disappearance of firms through time."

    Well, I can presume that CRSP tape is not perfect prior 1985 even knowing that this is one of the best stocks historical database, but I cannot imagine that any data is missing in CRSP for 1985-2001 period. So from 82 survival firms at 1985 (which are probably well-established companies) only 49 firms appeared in 2001. Hence formally losses for "Buy and Forget" investor who bought 82 survival firms at 1985 are about 40%. I know from Dividend Heritage Project ( that the reason for about 50% of firms disqualified for good dividend mark (i.e. has steady or DG payments) is merger. Probably this half-and-half ratio is applicable to Jung and Shiller (2005) vs. Poterba and Summers (1988) studies. In this case real losses for 1985 "Buy and Forget" investor should be about 20%. Just to remind - I am talking about the respectable surviving firms with 60+ years history of doing business here. This 20% of loss of position in stock portfolio in 16 years during the best time in history of US stock market (1985-2001) is terrible in my opinion.

    On another hand most of academic studies of stock market explore idea of periodical rebalance of portfolio. I understand that this mechanical process is important for a scholar study because active management will lead to strong difficulties in comparison of various studies. Academics (should) know that real effect of rebalancing is close to nothing or sometimes negative (see graph below /I guess from Lussier studies/)

    (click to enlarge)

    I understand that financial service providers vote for rebalancing because it creates money for them (fees, transaction cost, etc...). What I do not understand why individual investors follows such pundits recommendations (probably because they do not aware on real results shown in graph above). Common argument is "this stock is overvalued" based on price/fundamentals. I think it is too naive (at least for large caps) to assume that it can be true and each investor must remember simple relation:

    Market Price (known) = True Fundamental Value (unknown) + Mispricing (unknown)

    As old adage says "People know price of everything and value of nothing"..... There are rarely periods (Jan 2000 for NASDAQ, March 2009 for US market) when abs(Mispricing) is probably much large than True Fundamental Value, ......but who knows the future which affects to True Fundamental Value? IMO in such moments investor might take a risk and rebalance (I'd rather say re-allocate) his/her capital.

    Therefore I prefer "Buy and Monitor" strategy and a dividend investor IMO can monitor portfolio on annual basis but not rebalance it for the sake of rebalance.

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  • yaysayer
    , contributor
    Comments (15) | Send Message
    I am pretty late with the comment, but hoping for a reply nevertheless :-)
    For simplitcity's sake, lets keep talking about the numder of companies in the 1985 study compared to the 2005 one. if you were invested in those 82 companies, 45 would have been a succes. But since it is a 'buy and forget' strategy you still own 37 companies that you are not planning to monitor and may do what they will.


    Until we know which 37 companies these are and how they actually performed, there's not much of an argument against the performance of 'buy and forget'.


    Don't get me wrong, I really liked the articles so far, and got my feet wet in DGI a bit ago (up to the ankles by now!). I have the time and the interest available to try and squeeze a bit more out of my capital by taking a more active approach by doing my homework every now and then. For any of my friends who dont wish to spend the time learning how to analyse stocks, i recommend following an index. Additionally, with the ETF's available, your holdings in a company leaving the S&P will automatically become holdings in the company moving in.


    Buy and forget is a decent strategy IF you dont have the time/ don't want to spend the time, especially with the ETF's flying around everywhere.
    Buy and monitor can far outperform, IF you learn how to do your homework, and DO it on a regular basis.


    My two cents
    26 May 2013, 03:58 PM Reply Like
  • SDS (Seductive Dividend Sto...
    , contributor
    Comments (4480) | Send Message
    Author’s reply » yaysayer,
    Thank you for the comment.
    I'd agree that IF you dont have the time/ don't want to spend the time cheap ETFs (or better MFs - to avoid investment of dividends decisions) are a good choice. Actually I suggested last December to one of my relatives in this situation to split his money 50/50 for VTSSX/VDMAX and rebalance only when one of these MFs will be at 65% portfolio (I guess something ones in 20 years).
    IF you want to spend the time to select stocks and can be long-term investor you might win due to lower expenses - see
    Hopefully IF you want to spend the time to select AND monitor stocks you might do a bit better.
    26 May 2013, 04:53 PM Reply Like
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