Common Misconceptions About Buy-And-Hold Investing

Includes: GE, MO, T
by: Tradevestor

Buy-and-hold investing vs. active trading is one of the most debated topics on Seeking Alpha and the investing world in general. Both parties can be aggressive in protecting their stance but it does seem like the high frequency traders look down on the ones who buy and hold.

This article tries to shed more light on some of the misconceptions about buy and hold investing, though not as a direct reply to the article linked above. Let us get the ball rolling.

  • They Buy And Forget: To start with, there are no more buy and forget or buy and hold investors. Sure, these folks trade much less than their active trading counterparts, but they sure do not "forget" anything. Traders look down on dividend stocks like AT&T (NYSE:T) and Altria (NYSE:MO) for their lack of aggressive stock price movements, but results have shown the effectiveness of these stocks.

    Maybe back in the days when regular monitoring was not possible, people used to monitor their stocks only through dividend checks. But with more tools and websites available these days to monitor your stocks, we can safely call this group the "buy and monitor" investors. (That is the term this article uses going forward.)
  • They Never Sell: This is another common misconception about the buy and monitor investors. Just ask any dividend growth investor, he/she would tell you how much they hated it when XYZ reduced or eliminated its dividend. General Electric (NYSE:GE) is still a far cry from its glory days, because investors haven't "forgotten" the dividend cut. This group also sells to rebalance the portfolio. Active management is indeed a big part of their strategy. Even the person who is considered the epitome of buy and hold, Warren Buffett, turns over his portfolio frequently, though not completely.
  • They Never Trade: This point cannot be explained better than David Crosetti has done in this article. The last we checked, no brokerage firm disallowed a dividend/buy and monitor investor from trading for short term profits. The real smart investor tries to make money through all exploitable means he/she is comfortable with.
  • They Underperform During Bear Markets: Since traders "try" to be 100% cash or go short during corrections/crashes, there is a belief they perform better than the ones who buy and monitor and stay put in the market. But the point to be kept in mind here is that bear markets are actually a blessing for the buy and monitor investors as they get to accumulate more shares at lower prices (through DRIP or otherwise), increasing their number of shares and yield on original cost. The accumulated shares end up rocketing their returns when the market turns upwards. Some times you have to lose some money to get back more.
  • They Just Chase Yield: Since most buy and monitor investors are dividend fans, there is a common belief that they chase high dividend/yield with not much regards to other factors. But the fact is, its a much more complex decision than that. A majority of them evaluate a company's earning potential, dividend history, dividend growth rate among other factors.

Conclusion: So, there are two simple takeaways from this article. First is that buy and monitor investors do not always do "just" that. They can and certainly do indulge in other means of trading/investing. They do, however, maintain a few core positions. But the investing world is too big to restrict yourself with just one strategy. Things evolve, and so should investors. And second: Every investing strategy has a set of misconceptions, and we should dig deeper to get the full picture. We are working towards publishing such articles listing misconceptions about various investing strategies.

Disclosure: I am long T.

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