|
The
Buy
&
Hold
Myth
Throughout
the year 2000, there were over 22,000 stock recommendations
given by professional analysts. Less than 60 of those were
recommendations to sell. Yet, the Wall Street suffered one
of its worst bear markets in 35 years.
The amount of misleading information
disseminated by “professionals” is astounding to me. Why would
so many advisors urge you to hold onto a losing portfolio?
The answer lies in one of
the longest running, most widespread myths of them all: that
"buy-and-hold" is a sound strategy.
The strategy goes something
like this: Build a portfolio of reasonable stocks, then put
it away and don’t look at it again for a very long time. Supposedly,
it is the only strategy worth mentioning and the only strategy
that has any chance of “working.”
"While your portfolio
is sinking, who do you think is doing all the
selling? The professionals are doing the selling---the
same fund managers and analysts who told you to
buy-and-hold."
|
|
One disturbing aspect is that
many professionals who advocate a buy-and-hold approach never
practice their own recommendations. While they might urge
you to hold through even the worst of conditions, they are
the first ones to dump large blocks of shares when the market
goes south. While your portfolio is sinking, who do you think
is doing all the selling? It can’t all just be the unwitting
public. After all, they have been, in large measure, convinced
to hold on. The professionals are doing the selling---the
same fund managers and analysts who told you to buy-and-hold.
Nonetheless, buy-and-hold
continues to be touted as the “best” strategy of them all.
One of the more popular arguments is that the market inevitably
rises over long periods of time, regardless of occasional
bear market fluctuations. Buy-and-hold advocates are quick
to point out that if you had invested $1 in the Dow Jones
in 1901 you would have tens of thousands of dollars today.
There are several flaws to
this theory, however. First, the Dow Jones index was not the
same set of companies today as it was one hundred years ago,
and in fact it is re-adjusted every so many years. Which means,
you didn’t really “buy-and-hold,” rather your portfolio would
have been frequently adjusted along the way.
Second, who has 100 years
to grow a portfolio? Perhaps you have 20 or 30 years at best,
if for no other reason you will want to enjoy your profits
before you are too old. Considering a realistic time horizon
introduces a risk all by itself.
For instance, had you started your buy-and-hold portfolio
of technology stocks in March of 2000, you would have experienced
such a crippling loss that you may not have recovered within
your lifetime. The same experience could have happened in
1929, the early 1970’s, in 1987 and many other times in between.
A bear market is a reality, one that can permanently cripple
a buy-and-hold portfolio.
Sources of the Myth
Much of the buy-and-hold myth
has been perpetuated by the fact that certain, outstanding
stocks occasionally produce handsome returns over very long
periods of time. Most of us have heard stories about someone
who bought IBM in the early 50’s or Microsoft in the 80’s
and their value has multiplied by some windfall factor of
thousands. While these phenomena occur, they exemplify exception,
not the rule. For every IBM and Microsoft there are dozens
of other stocks that go nowhere, and many of them even disappear.
Witness the hundreds of high-flying “.com” stocks of 1999
that have been flattened to near-zero proportions and will
probably never recover; some of them are even defunct. Most
of these were, at one time, an emphatic “buy-and-hold” recommendation
from scores of professional analysts.
Another source of the myth
has been the increasing popularity of the mutual fund. Admittedly,
the proper approach to mutual fund investing is to hold the
fund for relatively long periods of time. This merely creates
the illusion of buy-and-hold, because in reality, the fund
is constantly adjusted. A good fund manager is continuously
dumping losing issues and adding new positions as market conditions
change. The fund is certainly not the buy-and-hold strategy
it is touted to be. It could not possibly be, otherwise it
would sink miserably as certain market sectors went out of
favor.
Still, another reason the
buy-and-hold myth continues is that the public has experienced
one of the longest running bull markets in history. Until
last year, only the oldest, veteran traders have ever seen
a real bear market. To the younger investor, buy-and-hold
has proven to be a “workable” throughout their relatively
limited experience.
Holding and Folding
So how long should you hold
a stock? Simply stated, you should hold a stock that as long
as it runs in your favor, otherwise you should let it go.
Holding a stock through long, sinking downturns in the name
of “long term investing” is a suicide game. The professionals
never do it with their own portfolios and neither should you.
The strategies outlined in
GarsWorld have no rule about time. The priority is to maximize
profit and to minimize losses. That might mean holding a stock
for five minutes, it might mean holding for five years.
Both the long-term “investor”
and day-trader alike have a fixed idea about time, that time-of-the-hold
is senior to profit. The “investor” assumes that long periods
of time are necessary to realize gain; the day-trader assumes
that minimal, quick-action time is the only way to shave off
profit.
GarsWorld supports neither
consideration. One should own a stock while it is rising and
not own it while it is falling. In volatile markets this will
look like day trading. In steadier markets it will look like
investing. Senior to it all is profit.
|
