Chuck LeBeau

Consumers Aren't the Only Ones Cutting Back

SmartStops.net published a sell alert on SKS more than a year ago (Jan. 4, 2008) after the stock had demonstrated unusual price weakness. The price of that sell alert was $16.51. There was also unusual price weakness in September and another sell alert was published at $9.75. If you are trying to pick a bottom, the current sell alert would be triggered at $2.16 (so you know what your risk might be).

'Buy and Hold' Is Alive and Well

Buy and hold might work if you are a Warren Buffett and never need the money. But most investors will need to cash out sooner or later and the money needs to be there. Where would you be if you invested ten years ago and needed the money today?

Granted that this might be an excellent time to be a buyer but if you had sold a year ago you could be buying a lot more today.

Buy and hold does nothing to control risk and its reward is questionable.

Buy And Hold: Beware the Devil You Don't Know

Buy and hold is not a strategy but is in fact the absence of a strategy of when to sell.

Now that there is mounting evidence of the failure of buy and hold the advocates of this very costly advice are trying to weasel out of their responsibility for such poor logic in the first place. Now we are receiving "qaulified' buy and hold advice like "buy and hold some stocks like XOM" or "buy and hold but sell the dogs" , etc, etc.

Give it a rest. Buy and hold was doomed the day it was invented because it fails to control risk. It fails to control the risk of bad stock selection and it fails to control the systemic risk of market like the one we are seeing now. It fails to recognize that the money invested needs to be there when you need it and it fails to recognize that markets don't need to be timed but risk does need to be limited by a real exit strategy.

Don't get me started on that ridiculous efficient market hypothesis. That's even dumber than buy and hold. Does everyone believe whatever drivel is published by an academic. What ever happened to good old fashioned common sense and a questioning mind? Let's get out of the theoretical world and back to reality.

Pickens's New Investment Strategy: Cash

Re going to cash - better late than never.

He obviously has a high tolerence for financial pain (but not as high as many buy and hold investors that are still holding tight).

Unfortunately his tolerance for pain was higher than that of his investors in his funds so now he's got a problem.

Famos makes a good point about transportation and energy problem. Makes me laugh when I see the T. Boone commercials.

An Opportunity for Patient Investors - Barron's

Re Who is responsible:

“If stupidity got us into this mess, then why can't it get us out?” ~ Will Rogers

The Dangers of Timing the Market

Buy and Hold is bad advice nowadays and has been for many years. The markets are much too volatile and even quality stocks are subject to large declines. A drawdown study of the S&P 500 stocks conducted by SmartStops.net shows that from January 1998 up to October 10, 2008

There were 61 stocks that had experienced a drawdown of greater than 90%

There were 124 stocks that had experienced a drawdown of greater than 80%

There were 204 stocks that had experienced a drawdown of greater than 70%

There were 305 stocks that had experienced a drawdown of greater than 60%

There were 383 stocks that had experienced a drawdown of greater than 50%

There were 447 stocks that had experienced a drawdown of greater than 40%

The actual result might be even worse because this study is subject to the positive effects of “Survivorship bias” because in this ten-year period there have been a number of stocks that went out of business and were deleted from the Index. These stocks had declines of 100% but are not included in this study.

Buy and Hold ignores any concept of risk vs reward. In today's markets the rewards of Buy and Hold are meager or even negative and as you can see from the quoted study, the risks are very great. In order to have a better reward with less risk market timers do not need to pick tops and bottoms. They just need to generally respect the major trends and limit losses.

A study published by Smart Trade Pro of the S&P 500 from 1984 through 1998 shows that it is much more important to skip the worst days in the market than to enjoy the best days. If you skip both the best and the worst days you will come out way ahead.

Remember that recovery from one of those 50% declines requires a 100% gain just to get back to even. Avoiding big losses is the key to success these days and you sleep much better in the process. Buy and Hold has unlimited risk and keeps you in the market all the time. That might be an acceptable level of risk if the rewards were high enough but my studies at SmartStops.net show that some simple market timing produces higher returns with less risk.

Yahoo vs. Tech Stocks: Sad Snapshot

Yahoo shareholders could have easily sold their shares in the mid twenties March through June and if they still believe in the fundamentals of the company they could be buying back twice as many shares now.

But that would have involved abandoning Buy and Hold and using some simple technical analysis.

Don't forget - its where you sell that determines the outcome of your investments. Buy and Hold has returned less than zero over the last ten years. That applies to the Dow Industrials and also to Yahoo which was trading above $28 ten years ago in November of '98.

If you are "Seeking Alpha" try spending more time working on exits. That's where the Aplpha is hiding. Buy and Hold is not just dying, its already dead.

Volatility Can Also Breed Opportunity

Good article.

I would suggest that Buy and Hold is the culprit here. Portfolios need to be protected from severe declines and if "cash is king" that cash needs to be generated by selling off losing positions in a timely fashion. Buy and Hold offers no capital preservation and no cash flow.

Nine Months Later: Some Annual Predictions from the Financial Press

Avoid Financial Disasters with SmartStops

In less than a year six widely held financial stocks have cost Buy and Hold investors more than $840 billion dollars. (Yes, that’s “billions” with a “B”).

$840 billion in losses is a number that might even get Warren Buffet’s attention. Think of all the retirement funds and college tuition money that got needlessly flushed down the drain in these few months. It’s a sad scenario but the saddest part is that the investors who lost all these billions could have avoided this disaster by simply using a “SmartStop” trailing exit.

Let’s look at the individual stocks and see what might have happened if some prudent stops were set rather than relying on a “buy and hold”. (You will notice that I did not refer to “buy and hold” as a strategy. It doesn’t qualify to be a strategy – its actually the absence of any intelligent exit strategy.)

Fannie Mae (FNM): The Sept/Oct 2007 high was $68.60 and FNM dropped to a recent low of $6.68. This 97% decline cost investors a total of $66 billion dollars. A SmartStop exit was triggered on Oct. 17, 2007 that would have limited the loss from the peak to less than 10%.

Freddie Mac (FRE): The Sept/Oct 2007 high was $65.88 and in less than 12 months FRE dropped all the way down to a pitiful 36 cents. When Freddie took that leap off the cliff it cost “buy and hold” investors $42 billion dollars. However a SmartStop exit was triggered on Oct. 16, 2007 at a price of $58.05 that might have preserved enough equity to get the grandkids through college.

Lehman Brothers (LEH): The Sept/Oct 2007 high was $66.98 and now they have filed for bankruptcy and the shares recently closed at a value of 21 cents. This painful disaster cost LEH shareholders $46 billion from the referenced high. Where was the SmartStop exit on LEH? It was triggered on Oct. 19th at $57.47 a share. Those funds could have been reinvested and earning money toward a comfortable retirement. Where is all that money now?

American International Group (AIG): The Sept/Oct 2007 high was $70.13 and now the stock is trying to stabilize somewhere below $5 after hitting $3.50. For the unfortunate shareholders who still own AIG that’s a whopping loss of $179 billion (give or take a few dollars). How smart was the SmartStops exit? It was triggered on Oct. 15, 2007 at $66.41 and there have been 28 more SmartStops sell signals since then.

Washington Mutual (WM): The Sept/Oct 2007 high was $39.25 and the SmartStop exit was at $34.30 on Oct. 15th. WM hit a recent low of $1.75; not even enough to buy a Starbucks latte. In less than a year WM shareholders lost more than $63 billion. Maybe if they hold long enough WM will eventually recover. (Although it will require a gain of more than 2000% to make back that 95% loss.)

Bear Stearns (BSC): It’s hard to believe that the Sept/Oct 2007 high for this ancient and respected brokerage firm with over 3 billion shares outstanding was $133.20 a share. Now they are gone and even with the government assisted bailout their unfortunate shareholders have lost more than $440 billion in equity. This one can never recover. That’s $440 billion of hard earned savings that’s now gone forever. (In case you are wondering, the SmartStops exit was at $110.11 on October 24, 2007. There were 17 more SmartStops exit signals prior to the takeover.)

I wonder if the Bear Stearns account executives told their clients that the best way to invest was to buy and hold?