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Everything Is "Buy and Hope"

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May 13, 2009 – Comments (5)

One of the phrases that has entered the investing lexicon over the past few years -- joining the likes of "zombie banks," "credit default swaps," "shadow banking system," and "where's my f&*%ing bailout money?" -- is "buy and hope." It's a derisive term, suggesting that there's little rational basis for buy-and-hold investing. It was even the first comment in my post yesterday about GM. It's understandable, given that the S&P 500 is lower today than it was 10 years ago.

But for all who like to throw around the term "buy and hope," I ask this:

What isn't?

What investment strategy isn't based on the hope that the future will be some approximation of the past (and only a chosen segment of the past, I might add)? Show me an investment with a guaranteed return, and I'll show you either 2% or a liar.

I recognize the doubts about buy-and-hold investing. In the recent issue of our Rule Your Retirement, we reviewed a market-timing strategy using simple moving averages, and interviewed Mebane Faber, author of The Ivy Portfolio and this study on tactical asset allocation. So I'm open to other strategies. But every alternative to buy and hold has its own "hopeful" elements.

You can invest in a hedge fund, and hope it's not run by Bernie Madoff. You can invest in an annuity, and hope it doesn't get taken over by the state insurance commissioner (which recently happened to a Rule Your Retirement subscriber -- he'll likely get his money back, but not for a while). You can invest in a corporate bond and hope it won't go the way of WorldCom bonds, which had a single-A rating less than three months before the company declared bankruptcy.

This is what I think the buy-and-hold naysayers are saying: Looking at all the different ways you can invest, buying an index fund or a stock and holding on for the next 10 to 20 years has a lower probability of providing the best return. And perhaps you're right. At least, you better hope so.

But enough from me. For those of you who have given up on buy-and-hold investing, what are you doing?

5 Comments – Post Your Own

#1) On May 13, 2009 at 11:06 AM, TDRH (99.85) wrote:

Holding what I have had long term -too cheap to cash in now.

Trading a small amount of the cash on hand and what was available from stop loss sales short term to try and rebuild. Holding reserve for one more major leg down from rising unemployment, foreclosures and increasing retail vacancy. Anticipating another entry point towards the end of the year.

It has not been pretty.

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#2) On May 13, 2009 at 11:37 AM, goldminingXpert (30.95) wrote:

Buying and holding bond ETFs, shorting everything else.

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#3) On May 13, 2009 at 11:58 AM, dudemonkey (58.51) wrote:

But for all who like to throw around the term "buy and hope," I ask this:

What isn't?

Investing. Doing your homework before you buy. Calculating an intrinsic value, discounting by a margin of safety, and calculating a target price.

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#4) On May 13, 2009 at 12:43 PM, russiangambit (29.94) wrote:

I am in philosophical mood today. Perhaps, after seeing EI’s quote. So here are my market tenets. They are not new. However, without hands on experience they don’t sink in.

This is for short term:

· At any time, market is not there to make you money, market is there to cause the most pain to majority of the investors. Even though it is not completely zero sum gain (due to inflation and earnings growth), it is close to it. Therefore, in any market there have to be more loosers then winners.

· Therefore, by defention the market is irrational. If it made sense, then anybody could simply follow their logic and become a winner. However it is in direct contradition with the statement rigtht above. The market’s nature is to take the most amount of money from every participant, and that makes it irrational since it causes it beahve in a fashion opposite to the established and known logic.

· If , by chance, you are one of the winners, don’t assume you are right and your logic is infallible. There is no right or wrong in the market , there is only supply and demand.

· Therefore, the most profitable strategy is to correctly identify where demand is. This is what all trend and momentum following strategies are based on.

· To identify the reversals one needs to foresee at what point the demand will fall. It usually happens after the last exhaustive push higher or a sudden bad news.

For long term , the fundamentals and economy and monetary policy do play a role. And long term, the market does always return to fundamentals .This is where I am actually stonger at predicting true trends. But I don’t have enough patience to wait for them to materialize. It could be a year or two or more before the economic fundamentals affect the market. As we all know , the market can be irrational for a very very long time.

We’ve been talking about US trade deficit for ten years, at least. Only now it is becoming an issue. Stocks bubble lasted about 10 yaers, housing bubble lasted 20 years. Social Security and Medicare issues have been on the table for 20 years, at least. We knew baby boomers will start retiring in 2008 and that won’t be good for stock market. But I am not prepared to wait 10-20 years to see a theory either successed or fail.

And then even if you repdict the trends correctly, there is an issue of picking the right stock. I simply don’t see how an average person with a 401K could make money in the market, except for the short stock bubble period of 1990-2000. That stock bubble was caused by demographics and migration towards 401K and muutual funds. It was all about money supply.

Then there are medium term trends that are easier to predict, like high unemployment will lead to sharp fall in the retail sales. But with retailers rallying 100-300% of the bottom, you would question your sanity if you are too early or too late on this trend. Timing and the supply/demand equation are everything in the market.

I keep saying, the stock market is too hard. Having pension fund money in stocks is crazy. May be 20-30% of retirement money should be in stocks, and not more, unless you know what you are doing and following the market and the economy each day. Expecting and pushing everybody towards putting their retirement money in stocks is more than crazy or irresponsible, it is criminal. It doesn't matter how many years a person has to invest. Even if they have 30 years, and they loose 50% on year 10, the chances are , they will never make it up, unless there is another bubble.

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#5) On May 13, 2009 at 4:31 PM, Donnernv (< 20) wrote:

Fully invested in relatively high dividend payers with long histories. Consumer staples, industrial low-price staples, recession resistant, significant overseas exposure.

e. g., PG, T, VZ, MMM, NYX, WMI, PEP, KO, GE

In it for the income flow.

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