Rarely in life do you get a true second chance. I'm not talking about an opportunity to make up for your mistakes, as in My Name is Earl, no, I'm talking about a real opportunity to press the reset button and make decisions knowing what you know now but what you didn't know then. The closest Hollywood analogy I can come up with is Groundhog Day.--and events of this week seem to require that we put this historic opportunity that we all have in some kind of fantasy context. This has just been too weird to be for real. [more]
Last Friday, Howard Lindzon advised investors to get out of the market and watch from the sidelines: 'Buy and Hold' Is for Fools: In Uncertain Times, Stick to the Sidelines. With a little prompting, he even took a bit of a shot at The Motley Fool and called long term buy and hold strategies “retarded” and "ridiculous." Given today’s events, you might think that Howard makes a lot of sense.
I know Howard a little bit. He’s smart and provocative. He also thinks that publicly traded companies are sub-optimal investments, so that kind of puts where he’s coming from into perspective. Moreover, he’s a momentum investor, when slumming it with the rest of us in the public markets. And when the market lacks direction, like our current market, prior to today’s decided downward move, momentum investors tend to make more time to spend with their families. On that we can agree, but I wouldn’t advise moving your investments to cash.
Raise your hand if you think the market will close up for the week? I don’t, but I wouldn’t be surprised either. Market days like today, and markets like 2008, remind us that we’re all momentum investors. A value investor putting money into energy stocks in the first half of this year likely earned no more than a relatively uninformed bet on an Energy Sector fund or ETF. The consequences of the finance sector upheaval dragged down performance of all sectors, regardless of value-oriented investment theses.
The question that every LTBH investor should ask themselves is whether today’s market would fundamentally change the thesis behind the positions in their portfolio. For example, I’d take a long hard look at the financial names in your portfolio—you’re not still holding Citi (C) are you? But if nothing has changed in your valuation of your investments, then sit tight. Unless you have a near term need for cash from your portfolio (if so, why do you have so much market exposure?), then the return expectations are much greater if you ride out the storm in the current market.
I like how Rick Munarriz makes the case for buy and hold in his recent articles on Jim Cramer’s active trading of Intuitive Surgical (ISRG): Cramer vs. Cramer—synopsis: Cramer’s active trading would have grossed returns ~50% over the last 3 years, while a LTBH investor would be sitting on ~450% gain. And then there's the jaw-dropping, almost unfathomable fact that most Fidelity Magellan investors lost money when Peter Lynch was at the helm. Why? Momentum investors jumped on board at the trading highs and abandoned ship when fund returns were soft.
The bottom line: Make your buy and sell decisions based on return expectations for the companies that you want to invest in, not on the market as a whole.
The smartest LTBH investors, IMO, understand how to play momentum rather than be played—that’s their edge. Whether using option puts or index options to hedge their portfolio, or dollar cost averaging their way to bigger investment gains, or simply refusing to sell in the midst of a market panic, there are lots of strategies to put market momentum to work for the more value-oriented investor. Mark Hulbert wrote a good article this weekend about the advantages of combining value and momentum investing approaches: Value and Momentum Investing, Together at Last.
Maybe Howard is right and only Fools stay in when momentum traders are fleeing the market. But that’s why we have more fun and make more money.
Fool On! [more]