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Is Buy and Hold Dead?

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June 11, 2009 – Comments (60)

The Great Debate
Many of you are participating in the Buy and Hold debate on Fool.com.  It’s inevitable in a period of sharp market decline that the anti-buy-and-hold crowd inspires a bacchanalia ritual to liberate the long-term investing crowd from their restrained indexing and buy-for-life market strategies.   But beyond the hype that accompanies a market crash, I think this is an important and enduring debate that persists throughout our investing lifetimes.  It’s a debate, in my opinion, in which there’s a lot of merit on both sides, and I’m sure you will become a better investor if you are willing to challenge the conventional wisdom of either investing approach.   As Buffett said about times like these, “profit from folly rather than participate in it.”

With the idea that you can make market volatility your friend rather than your enemy, the Fool will be sponsoring a series of articles to look at both sides of this debate, and I thought it would be a good idea to cover the action here in my CAPS blog.  I hope we’ll have a good discussion here in my blog as well as join the debate taking place on Fool.com. Extreme and nuanced points of view welcome.

For a primer on the arguments on both sides of this debate, see the second half of this blog post. And I’ll continue to update this blog as new pro or con Buy and Hold articles are published.

Round 1

In Tom Gardner’s initial article on the subject, Long-Term Investing Doesn’t Work, (don’t jump to conclusions about the title) he argues that LTBH investors must master the “four t’s” or they should not practice buy-and-hold investing:


1. Temperament. Can you stomach a 50% loss in the value of your investment portfolio over a two- to three-year period?


2. Time frame. Can you handle 10 years of zero returns from your investments?


3. Training. Are you capable of investing in public companies, diversifying internationally, and understanding what you own?


4. Tacking on. Are you inclined to add new money along the way, particularly as prices fall?


For those with shorter time frames, or those who seek maximum gains without the roller coaster ride from market peak to trough, he argues  that volatility control, the diversity of trading ETFs, and options can provide a smoother ride as well as market beating returns—which is the strategy behind Motley Fool Pro.


This initial article in the series sparked lots of spirited discussion, and inspired zlog’s excellent blog, entitled “It works!” a defense of buy-and-hold, particularly in our current market…



Quotes from the Fool.com Debate on Tom’s Article


BDF958 wrote:
Buy and hold is not dead, its as relevant as ever. Tthere are three types who say buy and hold is dead 1) Tthose who profit from increased transactions, 2) those who want your $ for their advice and 3) Those who are experts at day trading, because they welcome another fool into the arena who thinks they can be good devoting 6:30-7:30 PM nightly to try to do better than average.


Now that does not mean that the landscape does not change occasionally, and that you need to live with your picks forever, but we live in a time where "noise" AKA everyone has a voice and really wants us to hear it and this wonderfull thing called the internet enables me to talk to the world, that we must be incredibly selective about what you listnen to, and what you react to and recognize that others will react to dumb stuff, and that will cause short term volatility that will drive a buy and hold nuts


harry1n wrote:
In my opinion, the buy and hold days are over. That does not mean you should become a day trader, but modern technology is changing so fast that the probability that any one company is going to be the top dog forever is very low. I now set stop losses on every stock I buy and if it drops significantly it automatically sells. If it turns out I should have kept the stock, I can buy it back again for $7 on many on line sites. I will never again let my portfolio drop significantly based on predictions from so called stock experts, that on reality don't know any more than I do.

JustMee01 wrote:
People forget several aspects of buy and hold.


Buy and hold needs to be used in value situations. You can't buy a commodity stock on the run up and expect to hold it long term. You can't buy a cyclical and expect to hold it long term. By the same token, you can't buy a mid-cap growth stock at 50 times earnings and expect to buy and hold. If the market turns, you'll get trampled, and at high valuations spectacular performance is priced into the purchase.


On the other hand if you buy a company with little debt, good cash flows, and a historically strong dividend record at a reasonable price, you can expect to hold long term until those fundamentals change. Buy and hold doesn't apply to speculative purchases.


People also tend to look at their patience with their funds and ignore the behavior of their fund manager. They may be "buy and hold forever patient" but their fund manager may not be. He's buying. He's selling. It's his strategy that you're using. So, buy and hold just doesn't necessarilly fit with mutual funds either.



Buy-and-Hold vs. Market Timing Primer
As I mentioned in the opening to this blog, there’s a lot of hype around the Buy-and-Hold vs. Market Timing debate.  But forget the hype, you need to constantly evaluate the opportunity to hold vs. sell, and to understand the margin of safety associated with each of your portfolio positions and portfolio as a whole.


Here are the 3 of the most important issues to keep in mind as you evaluate risk and return in any market.


1. You will win with LTBH over a 20-Year investing period.

Source: Schwab Center for Investment Research Figure 1: Range of S&P 500 returns, 1926-2005.


Maybe the next 20 years will be different, but historically, including leading up to and coming out of the Great Depression, investors can’t lose over a 20-year investing time frame—and you are almost certain to beat the risk free rate of return. 18% annualized returns over your investing lifetime ain't too shabby.


2. If you’re not in the game, you won’t win big.
 

Source: Schwab Center for Investment Research, S&P 500, 1996-2005

A small number days drive much of the return—strengthening the argument that market timing can be risky. 

3. But it’s also true that market timing can work.

Pu Shen Federal Reserve Bank of Kansas City has written one of the more interesting articles on Market Timing (http://www.kc.frb.org/Publicat/reswkpap/pdf/rwp02-01.pdf).  A typical “common sense” approach to the Buy and Hold  vs. Market Timing debate is to argue that we should “Buy to Hold,” paying close attention to our valuation analysis and exit positions that no longer offer a compelling value opportunity.  Shen basically takes this approach by switching between an investment in the S&P 500 vs. 3 month treasuries based on a comparison of earnings yield.  In short, a trading strategy based on a perception of whether the market is overvalued or not.  The results were a clear victory for the timing strategies, which produced higher returns with lower volatility.  Perhaps geeks bearing formulas can make the difference between retiring in Maui or in a rundown apartment complex with a roommate named Maury…


My Bottom Line
My thoughts?  We’re all momentum investors, and the standard deviations in the shorter term holding periods in the Schwab study make this case very clearly.  With an 20 year+ time frame, you are near certain to generate positive returns—just be prepared for a bumpy ride.  If you’re temperament can’t take a 20% loss or more in your portfolio over a 3-5 year period, then you should look for risk mitigation—via asset allocation, timing, or hedging strategies.  And of course, if you’re near retirement you should reduce your market exposure.  Bogle’s rule of thumb that 1% of your assets should be invested in fixed income for every year old you are is a decent and conservative starting point.   Just never forget that much of the market gain comes in short bursts, and if you’re overhedged in those periods, or sitting on the sidelines, then you may have put forth a maximum effort with minimal rewards (or no reward at all).

So, go for it, and join in the conversation.  And keep checking in on this blog as I provide ongoing coverage on the Fool.com debate.

60 Comments – Post Your Own

#1) On June 11, 2009 at 3:11 AM, mperkins89 (98.70) wrote:

Mix between the two is probably best.  Have a certain part of your portfolio you keep long term and hold.  With the other part attempt to beat the market with timing.  The chart about "missing the top 40 days" really neglects missing the bottom 40 days.

 Obviously "market timing" and emotions lie on an inverse scale so  you need to also stomach the fact that your increasing your leverage as a the market experiences declide. (if your doing it correctly that is) And i think doing so is probably harder to stomach than being equal weight during a downturn.

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#2) On June 11, 2009 at 4:41 AM, portefeuille (99.56) wrote:

(I am actually on a "caps" game break, but just happened to see this and reposting my comment should be okay. Figure 2 indicates very little. Have a look at comment #23 here.)

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#3) On June 11, 2009 at 4:56 AM, portefeuille (99.56) wrote:

(I might add for the sceptical ones and those that choose words over mathematics that for every day from the "top100" (of the daily return table) you (on average) miss one day from the "bottom100" list. And the average of the (absolute values) of the returns is greater for the latter list than it is for the former one. I could elaborate. I will not (for now ...).)

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#4) On June 11, 2009 at 5:08 AM, portefeuille (99.56) wrote:

(Take out one country and you lose 23% (1) of the world's GDP, and 25% of pollution. That also indicates very little. All these "take out ..." arguments are zombies. Make a good story, but we are better off if they remain dead.)

(To make up for this I will remain silent for week longer than originally planned. Actually I think I qualify as zombie by the abovementioned standards.)

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#5) On June 11, 2009 at 7:31 AM, TMFJake (76.05) wrote:

Porte, the relevance of Figure 2 is when people violate the rule you identify comment on Eldrehad's blog that you reference above:

It does not matter which 80% of the days you miss as long as they are chosen randomly.

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#6) On June 11, 2009 at 7:32 AM, portefeuille (99.56) wrote:

that is correct.

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#7) On June 11, 2009 at 7:39 AM, portefeuille (99.56) wrote:

But then again managing to keep the ratio of "missed worst days" to "missed best days" away from 1/2 in a "statistically meaningful way" would actually be pretty hard to manage. Genius might help ...

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#8) On June 11, 2009 at 7:40 AM, portefeuille (99.56) wrote:

... pretty hard to manage.

... pretty hard to do.

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#9) On June 11, 2009 at 7:42 AM, portefeuille (99.56) wrote:

(... because they tend to show up during the same periods, those of high volatility.)

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#10) On June 11, 2009 at 7:49 AM, portefeuille (99.56) wrote:

It does not matter which 80% of the days you miss as long as they are chosen randomly.

When I wrote that I was not really worried about those unlucky ones that manage to always pick the "wrong" days, but about those "statisticians" that produce this kind of figures and insinuate certain interpretations that just simply cannot be drawn from the data in a "scientifically honest" way. 

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#11) On June 11, 2009 at 8:00 AM, portefeuille (99.56) wrote:

russiangambit on (among other things) economic pseudo-science:

 

------------------

#8) On June 06, 2009 at 12:45 AM, russiangambit (99.11) wrote:

> Would you like to rate yourself?

Well, I am certainly not 5 since I don't have an obcession with physics. Even though my first profession was math (applied to physics) and I went to the Moscow State University where all these famious russian physists and mathematicians worked at one time or another and I used their textbooks and some of my professors were half-crazy genuises, now I remember hardly anything. After the USSR collapsed (I was working on the phd at the time) I realized that I would probably expire from hunger before I finish the said phd, since nobody wanted to hire mathematicians. So, I quit the post-grad and went to work in IT, and never  used physics ever since. Therefore , my score is probably negative ten.  -))

Since then I also got business and finance degrees in the US. But strangely enough I don't feel any wiser for having them. For all the decisions I simply use common sense, and there are a few things in modern economics and finance were common sense doesn't apply.  The only thing that these degrees are really useful is that when something doesn't make sense when it comes to investing or economics, I don't write it off on my luck of knowledge , but I confidently assume that it really doesn't make sense.

------------------ 

(from here)

 

(that's it, really!)

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#12) On June 11, 2009 at 8:17 AM, TMFJake (76.05) wrote:

There are a lot of buy high sell low geniuses out there, which accounts for the growing interest in behavioral finance.  Figure 2, as you note, is a strawman.  It's relevance is to underscore the importance of having a systematic approach to managing risk (both diversifiable risk and nondiversifiable risk) if you're going to adopt a market timing strategy.

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#13) On June 11, 2009 at 10:05 AM, portefeuille (99.56) wrote:

Now something "positive": I like the new "Top Outperform Members" list (it comes "two weeks too late" for me, but #2 is okay. Does it take into account the nature of "short" (sometimes called "inverse", and some in addition "leveraged") ETFs?

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#14) On June 11, 2009 at 10:06 AM, portefeuille (99.56) wrote:

okay.

okay.).

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#15) On June 11, 2009 at 10:19 AM, TMFJake (76.05) wrote:

Porte, thanks.  The lists right now don't account for inverse or ultra ETFs.  We wanted to get something out quickly to address the growing number of requests.  But I think the new Top Tens will help people in the quest to identify the best investors based on a more varied criteria than just the CAPS scoring system...

* Top Outperform Members
* Top Underperform Members
* Highest Stock Returns
* Highest Outperform Returns
* Highest Underperform Returns

BTW, when you're up to it, I'd love for you to lay out some of your quantitative strategies--and, in particular, discuss how they are designed, if at all, to address the risk issue I identify in comment #12. Report this comment
#16) On June 11, 2009 at 10:34 AM, outoffocus (23.59) wrote:

Ok I've joined the debate. I'll repost my comment here:

I think the fatal flaw with the typical "buy and hold" methodology is that retail investors believe "buy and hold" means "buy and hold" indefinitely. Then they tout Warren Buffett as the example of this strategy. But the problem with this argument is Warren Buffett has controlling shares in most of the companies he holds. Therefore he actually has some say into the operation in the company, whereas the typical retail investor does not. Also, Warren Buffett does not just buy a company and just hold it. He looks for companies with good fundamentals and buys them cheap. Then if the price appreciation exceeds fundamentals he sells for a profit.

Retail investors on the other hand don't generally have a say in company's management decisions. This puts EXTRA RESPONSIBILITY on the retail investor to do his/her due diligence on the particular security they want to buy. This due diligence does NOT END once the security is purchased. The retail investor must evaluate the security on a PERIODIC BASIS to determine if that security is still as good of an investment as it was when initially purchased. The retail investor must evaluate the current fundamentals of the security and determine whether current management decisions are in the BEST INTEREST of the company in the long term.

Then and only then will the retail investor be successful in their buy and hold strategy.

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#17) On June 11, 2009 at 10:40 AM, portefeuille (99.56) wrote:

BTW, when you're up to it, I'd love for you to lay out some of your quantitative strategies--and, in particular, discuss how they are designed, if at all, to address the risk issue I identify in comment #12.

For the short answer please skip the following paragraph.

------------------

Wow, that is quite a welcome change. There are a few "caps" game players that would like to kick me out of the "caps" game for a variety of reasons. I cannot give the link (and many know how much I enjoy doing that ...) because that post by a player (who (quite ironic!) said in comment #14 here that he is trying to "game the system") was removed. Two (if you ask me, somewhat contradictory) of those reasons were:

1) your players are all the same

2) you created so many different players so that one could reach the "top10"

Some of them also got the history of those players mixed up (if anyone cares, it is here).

---------------

Now the short answer.

Yes, it will be my pleasure to lay down some of the "mechanics" behind my players. In 2 weeks maybe.

 

 

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#18) On June 11, 2009 at 11:04 AM, ChannelDunlap (< 20) wrote:

outoffocus

Couldn't have said it better myself.  When I first started investing that was the idea I had of Buy & Hold.  Find a good company, buy it, hold onto it forever till it's worth billions.  Clearly that is how it works.  This is no longer my view of things, but I understand how easy it is for new investors to fall into that type of thinking.

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#19) On June 11, 2009 at 11:50 AM, russiangambit (29.49) wrote:

1. Temperament. Can you stomach a 50% loss in the value of your investment portfolio over a two- to three-year period?

No.

2. Time frame. Can you handle 10 years of zero returns from your investments?

No.

3. Training. Are you capable of investing in public companies, diversifying internationally, and understanding what you own?

Yes.


4. Tacking on. Are you inclined to add new money along the way, particularly as prices fall?

Yes.

I am 50-50. Please, help. lol.

But , apprently, old fashioned buy-an-hold isn't dead yet. Just look at the LongTermBull post from yesterday.

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#20) On June 11, 2009 at 12:53 PM, TMFJake (76.05) wrote:

outoffocus, agree with your comments.  What are your thoughts on your "vigilant buy and hold" approach in a market like we had last fall?  Admittedly, we may have experienced a "100 year event," but, referring to the Pu Shen paper in my original post, do you feel that the "vigilant" buy-and-hold investors should focus primarily on his or her positions or also pay attention to the macro-econmoic environment? 

I know at this year's Value Investing Congress the common lament was that value investors have not paid enough attention to the macro-economic climate.

What's your tendency?  e.g. Focus exclusively on the value prop of your positions and dollar cost average in a market downturn?  Take money off the table when the overall market looks overvalued (assuming there's no safety in a general downturn)?  Take on additional "insurance" through hedging? 

Fool On!

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#21) On June 11, 2009 at 1:43 PM, outoffocus (23.59) wrote:

TMFJake

Well, in full disclosure, I literally started investing in individual stocks at the beginning of 2008 (fun time to start right?). Prior to that I was in mutual funds. I invested both retirement funds and individual funds. In choosing my stocks I already "priced in" an economic downturn (I still didn't anticipate the magnitude).  In the end I ended up mostly in commodities and foreign stocks. My main strategy was to look for high dividend paying, low P/E and P/BV stocks. Coincidently many of those stocks were in BRIC countries and/or commodity plays. Holding those securities during the crash last year was tough. But like a typical buy and holder, I added on the way down.  I also re-evaluated my positions in each stock to determine if they were still good investments.  All except one stock (a financial stock) remain a good investment so I took my loss in that one position and moved on. 

Because I only invested money I didnt need in the near term, I didnt panic sell at the bottom.  I'm beginning to reap the benefits of not selling, as some of my positions are back in the "green" and the rest are approaching "green" territory.

So as you can see I'm much more conservative in my actual investment strategy as opposed to my CAPS strategy; because, well, CAPS is only a game.

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#22) On June 11, 2009 at 1:49 PM, Londamania (60.62) wrote:

Agree with outoffocus.  Add in the macro-economic trend of baby boomer retirement which will keep the market under sell pressure (as retirees convert stock assets into safer securities or just cash) until 2018 or so (according to US demographics), which means we can expect more of the last ten years for approximately the next ten years.

Also add in that the value proposition of TMF is taking advantage of market timing - through luck.  TMF started in late 2002 I believe (mid2002-mid2003 doesn't matter much for the sake of this point).  So they started just as the last bull cycle got going and - show mostly a break even result to where we are today (compared to investing same cash in say the bond market or even just long term CDs).  What would TMF returns on their advisory services be if they started say in 1998 or 1999?  or 2006 or 2007?  Crushed!  And not coming back any time soon.

LTBH taken as "forget about it till you retire in 25 years" is dead .  I got crushed twice by that - 2000 and 2008. Never again.  LTBH taken as a "I made back some gains in March and April and am in cash right now waiting to see how the summer goes, and will come back in the Fall (or later if doom strikes) to buy and hold select companies for the next 5-7 years until I think the market is generally oversold again at which point I will go to bonds or CDs for a few years" is alive and well. 

And we will need to see how the Obama administration affects this - they may help out LTBH greatly by instituting proper market oversights, limiting company looting from within by irresponsible bad apple execs & boards,  and limiting market boom/bust cycles in general.  This will all end up greatly increasing market and overall company stability which will help LTBH.  But never again with the forget attached to it :)

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#23) On June 11, 2009 at 1:54 PM, outoffocus (23.59) wrote:

And yes I did add some "mild" hedges, take profits in short term investments, and added some positions in sectors I believed were undervalued. 

 

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#24) On June 11, 2009 at 2:24 PM, TMFJake (76.05) wrote:

Londamania, do you calculate the tax implications of your "sell in May and go away" strategy?  Like you, I am considering greatly reducing my market exposure, since I think the potential for a large correction is much higher than the potential for significant upside at these market levels.  However, I'm more likely to take profits on my long term capital gains (and shockingly still have some after the collapse!) but let my short term profits ride, for those that I still think have medium-to-long term growth potential.  And I might take on some insurance for my retained long positions by adding a market hedge.   

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#25) On June 11, 2009 at 3:38 PM, spongeLarry (50.42) wrote:

HA HA HA HA!!

It looks like someone needs to define long-term buy and hold in order to have a meaningful discussion.  Buy and hold to one person may mean market timing to another. 

What is "buy on dips" if it isn't market timing??

"I'll sell if it gets overvalued" is market timing.

"Sell in May and go away." is market timing.

"I added some hedges." is market timing.

Buy and Hold is the strategy that 99.9% of everyone's 401K experienced via their mutual fund managers.  Everyone got a haircut. Nice huh?

Agreed, those graphs are nonsense.

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#26) On June 11, 2009 at 3:40 PM, FleaBagger (29.37) wrote:

"But then again managing to keep the ratio of "missed worst days" to "missed best days" away from 1/2 in a "statistically meaningful way" would actually be pretty hard to manage.

... pretty hard to manage.

... pretty hard to do."

Actually, it was fine the way you had it. From dictionary.reference.com:

manage(tr.v.)to bring about or succeed in accomplishing, sometimes despite difficulty or hardship.

This is the first definition.

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#27) On June 11, 2009 at 3:51 PM, portefeuille (99.56) wrote:

Maybe the next 20 years will be different, but historically, including leading up to and coming out of the Great Depression, investors can’t lose over a 20-year investing time frame—and you are almost certain to beat the risk free rate of return. 18% annualized returns over your investing lifetime ain't too shabby.

It has been wrong (buying close to the peak in 1929 (1)) and it may well be wrong again in the not so distant future (maybe 2000-2020).

(wash your mouth out (see this video 1:51-2:06) ...)

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#28) On June 11, 2009 at 5:44 PM, TMFJake (76.05) wrote:

Porte, exception that proves the rule. ;)  I don't believe you can fully discount Figure one (as SpongeLarry suggests), although the potential for somewhat underwhelming returns over a 20 year period is what makes this debate interesting.

SpongeLarry, your mutual fund managers are market timing if we extend your definition.  If I follow your extremes, then every investment strategy looks like market timing. So, how would you define LTBH for this debate??? :)

Foolishly,

jk

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#29) On June 11, 2009 at 6:37 PM, TMFCrocoStimpy (95.48) wrote:

Portefeuille, I don't believe the graph of the ^DJI includes dividends, which may make the difference between eking out a small gain the the 1928 - 1948 timespan (per Schwabs claim) and simply examining the index value.

That said, even a +3% annualized return over a 20 year period wouldn't give anyone a real warm fuzzy feeling when thinking about it happening to them now.

-Stimpy

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#30) On June 11, 2009 at 8:24 PM, foolsMeThrice (99.61) wrote:

Whether or not you're a buy and hold investor depends on how much money you have at stake.  If your slinging around 50 billion it is obvious that short term trading will not be effective for a market participant of this nature.  The sheer weight of the trades will kill the returns.  On the other hand, guys like us don't have to worry about market impact, even if you're slinging around millions.

I wrote a python script that would calculate the compound returns for a player given the following restrictions:

1) Sells occur before buys in a given day.

2) Underperform is considered going short.

3) Outperform is considered going long.

4) The weight of the next pick will be equal to capital/(number of remaining picks).  If I have 190 picks and 10 units of capital the weight of the next pick will be 10/10 = 1.  The working capital is reduced by that weight.

5) When you sell (or cover), your capital will be augmented by the  weight*gain (w*g). I define the gain like they do it engineering (price sold)/(price bought).  For a underperform call this is (2 - (price bought)/(price sold short)).

So here is the effective gain (for return subtract 1)

2006-10-06 2009-06-11 bravobevo capital + equity: 3.364334
2007-09-17 2009-06-11 fransgeraedts capital + equity: 2.154132
2008-11-17 2009-06-11 translator999 capital + equity: 1.738266
2008-11-20 2009-06-10 portefeuille capital + equity: 1.953434
2006-06-26 2009-06-11 chk999 capital + equity: 1.738482
2007-01-29 2009-06-11 mgiv capital + equity: 1.800625
2007-07-05 2009-06-11 abitare capital + equity: 2.157164
2009-02-09 2009-06-11 AndreylikesMTL capital + equity: 1.54

2006-10-16 2009-04-17 SpecBear capital + equity: 1.901175

To convert these into logical scores, subtract 1 then multiple by 100 then by 200 for max number of picks.  We also have to add the S&P out performance amount.  Using the start date for the very first pick and the end date of the very last pick to estimate the S&P return to get about 30*200 for both bravobevo and mgiv.

bravobevo 47200 + 6000 = 53200

mgiv 16000 + 6000 = 22000

which trounces the score using the motley fool approach because it takes advantage of compounding and corrects the underperform call score calculation by looking at capital not how it does versus the S&P.

Now you may want to consider tax.  Well taxed like income, for guys like us it is still better to sell short term and pay your tax.

 

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#31) On June 11, 2009 at 10:13 PM, spongeLarry (50.42) wrote:

Figure 1 does not include data past 2005.  The biggest drop from Oct. 2007 to Feb. 2009 is not included. Besides, all Fig.1 shows is that you have to wait 20 years to guarantee a "positive" return. Big deal. You might have attained 10-fold the returns had you attempted to time the market for 20 years.  Especially if that 20 year cycle occured between 1989 - 2009.

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#32) On June 11, 2009 at 10:33 PM, ENFJ (< 20) wrote:

OK I am new to trading. My Dad left me a few shares when he passed last Oct, he was 96. I have been reading and studing as much as I can regarding how to invest. It is my way to remember him, he really enjoyed owning the few shares of Sears etc that he recieve from his retirement after driving a deliver truck for 30 years. 

I just finished MF's Million Dollar Portfolio. I  have come to realize that there is a ton of info out there regarding the science of how to buy, what to buy, when etc. But very little about when to sell.

Here is the truth... Regardless of wheither it is a buy and hold world or not eventually every security will be sold... If not by you, then your kids.

Where is the science about when to sell? 

Cheers!

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#33) On June 11, 2009 at 10:48 PM, spongeLarry (50.42) wrote:

Well, I always thought LTBH meant that you didn't sell unless there were major changes in the company that caused your "original reason for buying" to fizzle.

Unloading financials made sense under LTBH as they "revealed" major changes: mostly from indecipherable balance sheets that did not have toxic real estate debts transparent.  This is criminal in my view, but that's another topic...

Selling stocks in other sectors would not be justified under a LTBH strategy - selling just because the market is collapsing is NOT what you are supposed to do if you are following LTBH. 

Adding to your position by $X by buying on dips negates your LTBH philosphy because there was a period of time that you held $X in cash, waiting for the market to go down. Well, what if it didn't go down? You missed your chance. Do you then rationalize your move and say "I didn't intend to invest an extra $X anyway" and proceed to compute and brag about the returns you got minus the $X, or do you take into account the lost returns you could've had if the $X had been invested in the 1st place? You have to compare the 2 philosophies fairly - if you've got cash on the sidelines "waiting" for a market dip - you better include that sum in your total return when comparing it with a full market timing strategy.

Almost every company sank from Oct., 2007 to Feb. 2009 - even when their fundamentals were unchanged.  Market timing would have you out based on the momentum and direction.  LTBH would have you stay in.  I don't have a clue what my 401K mutual fund managers did, but I know that every fund that was available to choose from fell like a rock... I don't call that good management, I call it non-management.

 

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#34) On June 11, 2009 at 11:05 PM, madcowmonkey (< 20) wrote:

Buy and Hold still works, but what is the point when you see the marketing sinking 50%. It is just as important to analyze your holdings that are buy and hold classified as it is for traders. I know that selling doesn't fit the buy and hold model, but if you can sell after 8 years at it's believed high point and then get back in after the market has tanked, then you are still holding, but with bigger gains.

Buy and Hold shouldn't imply lazy investing. It should alwasy be assumed that getting out at the right time is just as important as getting in at the right time.  Even if the position was considered a buy and hold forever. The stigma of hold is what get's people slaughtered. 

 

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#35) On June 12, 2009 at 12:03 AM, foolsMeThrice (99.61) wrote:

i figured comment #30 settled it.

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#36) On June 12, 2009 at 1:47 AM, portefeuille (99.56) wrote:

Portefeuille, I don't believe the graph of the ^DJI includes dividends, which may make the difference between eking out a small gain the the 1928 - 1948 timespan (per Schwabs claim) and simply examining the index value.

maybe. Have a look at this: 1.

But also have a look at the "real" (vs. nominal) Dow Jones (calculated in 2001 Dollars) in figure 3-1 here. It peaked at around 3905 in 1929 and was at around 1300 in 1949. I will try to find out whether dividends were high enough to offset this large negative (real) return.

i figured comment #30 settled it.

Those are nice returns indeed!

 

 

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#37) On June 12, 2009 at 2:03 AM, TMFJake (76.05) wrote:

foolsMeThrice: Very cool study.  I would follow the active picks of that group any day.

spongeLarry: Thanks for the LTBH definition.  I like your critique of excluding unused cash on hand from LTBH portfolio returns.

ENFJ: A simple answer is to sell when there's a more compelling risk-reward opportunity than an active position in your portfolio--and that more compelling opportunity could be to move to cash...

 madcowmonkey: Well said.

--------------------

DEBATE UPDATE

-------------------

There are two new published pieces on this debate:

1.  The Fool Interview with Mohamed El-Erian, the CEO and co-CIO of Pacific Investment Management Co. As many of you know El-Erian believes deleveraging and regulation are going to slow GDP growth and drag on the the markets for the forseeable future.  He advocates:

* Much more active management and response to short term cyclical trends.

* Understanding that traditional indexing and diversification strategies may underperform in the volatilie market climate that he expects that we'll continue to live in.  

* Seeking geographic diversification.

* Building a strategy for inflation (e.g. TIPS, Gold).

2.  UltraLong's blog post, "The Life and Subsequent Death of Buy and Hold Investing."  UltraLong argues that techonolgy improvements, lower trade costs, better access to information, tick rule reductions, growth in options, and the emergence of ETFs, have all contributed to the demise of buy-and-hold.

 

 

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#38) On June 12, 2009 at 2:31 AM, Tastylunch (29.54) wrote:

I think Buy and Hold is s poorly understood concept. Too many people take it as a  "buy and ignore"

When you buy a company yeah you gotta give it some rope but if the investment thesis or the company itself breaks down  than you gotta bail. Otherwise you might ride it to zero.

Take National City (was NCC) for example. If you bought in the 1930's and held through the mid 2000's like my granndfather did you made a killing. But if you held till this year you basically lost everything obviously.

I think even with Buy and Hold you have to have a exit strategy and you need to montior what you have periodically.

Also I think the assumption that Buy and Hold will work is based on several assumptions people often don't take into account when thinking about it

here are some I can think of

1) the Us dollar doesn't collapse

2) There will be no major protracted military invasions on American soil

3) there will be no major pandemics or population shrinking events over a long period in America

4) There is no revolution in America

5) the US markets remain the pre-eminent markets in the world  for foreign capital.

6) American investors retain their enthusisam for stock (a higher  % of Americans own stocks than most countries according to data I've seen)

7) the US economy won't enter a multidecade period of Deflation

Some of these are more likely to happen than others, but I think people forget how unusual the Period of 1945-2000 was in American economic history.

Every thesis has assumptions that it is dependent on to remain viable. Buy and Hold is no different.

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#39) On June 12, 2009 at 2:36 AM, Tastylunch (29.54) wrote:

oh and i guess hadn't refreshed forawhile.

I agree with  madcowmonkey  

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#40) On June 12, 2009 at 3:11 AM, goldminingXpert (29.76) wrote:

Comment 30 is unfair at this juncture as we haven't gotten to play CAPS yet in a bull market. Those of us incompetent good-for-nothing "random walkers" to quote Mr. 12 profiles (portefeuilles) that dare to red thumb stocks in a bear market will switch to green thumbs in a bull market. Why hassle with trying to pick stocks that go up as the market is crashing? Sure, buying stocks at $1.50 and hoping they triple will create better returns if you set up a profile at the correct time--but those of us shorting junk all the way down could make consistent money not relying on zombie companies to launch unreal rallies.

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#41) On June 12, 2009 at 3:28 AM, portefeuille (99.56) wrote:

Those of us incompetent good-for-nothing "random walkers" ...

I never mentioned anything like "incompetent" or "good-for-nothing".

The "random walk" / "'caps' game 'accuracy'" issue is discussed in this postbigpeach has said that he will elaborate on that as soon as he finds the time. I think the results by him and by foolsmethrice (see comment #30 above) are very relevant to the "caps" game.

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#42) On June 12, 2009 at 9:13 AM, TMFJake (76.05) wrote:

GMX, FWIW, I'm confidant that you're going to crush in a bull market as well.  And I look forward to all your green energy plays. ;)

From my perspective, Foolsmethrice's comment #30 above is more focused on making the case for active trading and less tied to the debates around 'random walk /caps game accuracy issue.'  I don't see in argument in comment 30 about whether the results reflect true alpha, CAPS gaming, or a mixture of both. And the comment makes the case that an absolute return measure is missing from the CAPS relative scoring system.  But, per my comment #15, we correct this omission somewhat in our new Top Ten Lists (click on the Top Tens Link).

With regard to the CAPS accuracy strategies, I do think the issue is particularly relevant in these volatile markets, and we are considering changes under the assumption that we're likely to stay in a volatile market for some time.  Even in today's markets, it can be a risky or time consuming strategy on CAPS to purely play a technical trading game trying to capture 5% gains randomly.  Way more people see their scores blow up in a negative way than in a positive way.  If we had an API to support automatic trading, it would be easier. The new Limit Orders may facillitate this somewhat, but the rules are not flexible enough to eliminate a lot of the manual effort required in this strategy--that wouldn't be true if we supported close limits based on score, which is why we don't!

 

 

 

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#43) On June 12, 2009 at 1:38 PM, goldminingXpert (29.76) wrote:

There's no need whatsoever to change accuracy, but if you do change it, change it to you get one accuracy check per stock up or down... so if my cumulative 12 picks on SKF have scored positively (they have) I am 1 for 1 accurate. If my 12 picks scored net negative, I am unaccurate on 1 out of 1 pick. That solves most of the "non-problem" that the CAPS bull community has.

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#44) On June 12, 2009 at 6:09 PM, TMFJake (76.05) wrote:

GMX, my only concern with the one accuracy point per stock is that it will discourage future CAPS picks on the stock, once you have a victory in the bag...

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#45) On June 13, 2009 at 9:08 AM, portefeuille (99.56) wrote:

... , change it to you get one accuracy check per stock up or down... so if my cumulative 12 picks on SKF have scored positively (they have) I am 1 for 1 accurate. If my 12 picks scored net negative, I am unaccurate on 1 out of 1 pick.

That would certainly be an improvement. I might consider dropping the quotation marks for the word "accuracy" (joke).

To "get a feeling" for that accuracy (see, they are gone!) I have calculated it for portefeuille. The result: accuracy_new = ca. 83.8% (see comment #29 here).

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#46) On June 13, 2009 at 9:57 AM, TMFJake (76.05) wrote:

Another approach could be to decay accuracy of older picks, so that an accurate call from 5 years ago doesn't count quite as much as accurate calls over the last year or two.  This type of accuracy decay model would continue to icentivize making new picks, but wouldn't overweight the banking of accuracy on a single pick.  Something similar could be designed for lots of picks on one ticker in a short time frame.  Unfortunately, this would make the CAPS scoring system even less transparent. ;)

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#47) On June 13, 2009 at 11:09 AM, portefeuille (99.56) wrote:

Unfortunately, this would make the CAPS scoring system even less transparent. ;)

hey, as long as the new systems proves that I am the best I don't care about transparency!

 

(joke ...)

                                             

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#48) On June 14, 2009 at 8:49 AM, snakeflake (68.83) wrote:

I will admit that I did not read ever post in this chain.  So my opinion may have been stated or overstated. I do not believe buy and hold is dead only dormant with the unstability in the market right now.  I do think that there were some great opportunities to get some quality equities low and hold them, and I have.  But my major strategy for the last 6 months is to buy low and sell when price increases 20-30%.  I have bought and sold the same stocks many times.  If we have a v-shaped recovery, we will soon be back to buy and hold, but if we have a w-shaped recovery as has been suggested by many then short-term trading is the plan because you will have a chance to buy ondervalued  stocks and go long again in a year or two. 

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#49) On June 15, 2009 at 9:36 AM, madcowmonkey (< 20) wrote:

Odd:) I agree with Tasty's comment as well. His is hitting on all the valid points a LTBH investor needs to consider. While mine just contemplates the basic idea that the market isn't always going up.

 TMFJake- thanks. I hope others have the same response as you.

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#50) On June 15, 2009 at 2:11 PM, dwot (97.03) wrote:

Well, my first visit to investing in the market I found myself approaching breaking even after 8 years, with investment advisors.  That was buy and hold, well, I will simply call it garbage.

My second visit, which was in the last 3 years, of which half I have been out of the market, was take profits when they are there and it worked very well.  It was also simply stay away if everything looks overvalued, hence my exit from the market.

There is simply a bad time to get into the market and it is garbage that with a 20-year time frame then it is ok to invest any time.  The opportunity costs of buying over valued investments can be irrecoverable.  Take the housing bubble for example.  The same is true for the stock market.

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#51) On June 16, 2009 at 9:47 AM, madcowmonkey (< 20) wrote:

i figured comment #30 settled it.

I guess, if you don't consider how buy and hold has worked for others and what there returns are. I am not saying that trading doesn't work, I know it does, but so does LTBH. Is it dead? For some people yes.

Right now we are sitting at a lower point for the market and LTBH looks horrible for many of investors that thought the market just went up. Hopefully people on CAPS are not as naive. If you are really looking to make as much money as possible, then LTBH has its limitations in a down market, obviously.

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#52) On June 16, 2009 at 5:49 PM, TMFJake (76.05) wrote:

Some noteworty updates on the great debate:

 * Who better than John Bogle, the father of indexing, to make the LTBH case.  Read The Fool's interview: Bogle on Buy and Hold and the "Long" of Long-Term Investing 

*  Bryant Riley, founder of Riley Investment Management and investment banking firm B. Riley & Co. Long-Term Buy and Hold May Not Be the Smartest Investing Strategy.  As many others have in this debate, Riley is arguing that LTBH shouldn't neglect relative valuations.

* Jim Oberweis, president and lead portfolio manager of Oberweis Asset Management makes the case for LTBH in the context of moder portfolio theory--asset allocation and diversification are his keys to success.  Check out Oberweis's argument in: Long-Term Buy and Hold Still Works

* My friend Howard Lindzon, founder of StockTwits and WallStrip, argues that LTBH is certainly out of favor in the current cycle.  And he sticks retail brokers in the eye just for good measure!  Check out:  If Buy and Hold Ever Lived, It's Dead Now

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#53) On June 17, 2009 at 9:55 AM, spongeLarry (50.42) wrote:

As one who doesn't like LTBH, let me point out some shortcomings of the above mentioned pro-LTBH articles.

Don't get me wrong, I think LTBH is fine for those who don't or can't follow the market or the news, which is the majority. But for those of us who enjoy following the market, a crash that sinks all boats is not that hard to see coming.

Jim Oberweis says "Though, one caveat to what I'm saying is that I do think that in extreme periods there may be opportunities to add value by reducing or increasing equity exposure. For example, if you looked at technology stock valuations in 1999, they were far above median market valuations. There could have been an opportunity there to reduce equity exposure and earn excess returns."

This statement doesn't sound like LTBH philosophy, it sounds more aligned with short term trading based on valuation.  My philosophy is short term trading based on market momentum. Momentum vs. valuation... it doesn't matter, its NOT LTBH.

John Bogle's interview is very interesting: his math notwithstanding, he states that now, LTBH is risky with stocks.

That's not exactly a ringing endorsement of LTBH from most people's concept.  To be complete, he does state that short term trading is a loser's game - his opinion, not mine. I think (if I read it right) his recommendation is to use LTBH with index funds, not stocks. Of course the owner of Vanguard would say that. If you MUST use LTBH, I think that last statement is true.

 

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#54) On June 18, 2009 at 1:12 PM, herbs814 (< 20) wrote:

The more fictional money the Federal Reserve pumps into the economy, the more volatile the stock market (or any liquid market) is going to be. The supply of fictional money (e.g. "dollars") creates its own demand for investment assets, regardless of the fundamentals.

The monetary policy of the Federal Reserve, along with the fiscal policy of Congress and the regulatory policy of the executive branch and the judicial activism of our court system, will create asset bubbles -- booms and busts -- in increasingly bigger proportions, until we finally demand that politicians and judges stop trying to micromanage our lives. Yes, BUY AND HOLD IS DEAD. The Federal Reserve and Big Government killed it.

 Buy and Hold will lag behind properly timed and selected trades until we have a government that respects the Constitution and the ideas of limited government, enumerated powers, and honest money. Just to be clear we should enter this amendment: "Congress shall make no law abridging the freedom of production and trade." and we should strike all laws and regulations that conflict with the rights of producers and market participants. 

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#55) On June 18, 2009 at 2:35 PM, TigerPack1 (99.02) wrote:

"Sell in May and Go Away until November" works relatively well EXCEPT IN THE YEARS AFTER A MULTI-YEAR BEAR MARKET ENDS.  It works best after a mutli-year bull move, especially if you run it for 2-3 years afterward.

Buy and Hold this one:

Solaris here's my pick for the AllStarPortfolio --- (already up 2%+ this morning darn it)

3 to 5 Year, Long-Term Pick

Colonial Properties (CLP) is a medium-sized Real Estate Investment Trust (REIT) based in Alabama.  It has fallen hard from around $50 a share in 2007, with the real estate bust and deep recession in the U.S.  Still, around $7 per share investors are buying solid annual cash flows of $1.50-$2.00 per share that are available to owners as dividends or reinvestment, even during an extremely slow spot for the economy and real estate markets.  The company is slated pay around $0.60 in dividends the next 12 months, which works out to better than an 8% yield for owners.  The liquidation value of the company’s properties is likely well north of $7 per share, with “older” holdings of real estate at cost providing a net book value of $20 a share currently.

For investors looking for a high margin of safety (Ben Graham followers), Colonial along with nearly every REIT in the U.S. provides a great risk-adjusted entry point today.  I believe the actual bankruptcy or default risk of owning a long-standing REIT product is much smaller than the “implied” risk of holding this business group, as investor psychology is incredibly numb and bearish on the sector after a multi-year bust.  Already many REITs have raised equity lately or closed new financing agreements (like CLP) to provide extra capital to survive the next year or two of projected economic sluggishness.

I love stocks that have been beaten down over several years for a variety of reasons that are not entirely company specific.  They have turned into some of my best long-term buy and hold investments.  Colonial has suffered from three hits to its stock price and business health not completely under management’s control, including a monster real estate bust, an evaporation in credit for commercial real estate loans, and the worst bear stock market in modern history for all publicly-owned businesses.

Management has been heavy buyers in the stock the last 6 months, on dips in the price under $6 to as low as $3 per share, and “insiders” own a considerable amount of stock around 12% of the outstanding shares.  The company’s board of directors scores highly on third-party corporate governance scores.  Another 30% of the company is held by REIT index mutual funds and ETFs that will not be selling shares any time soon.  In fact, the index funds will be large net buyers in the future as all REITs see renewed investor interest in the coming years from rising rates of inflation.  At last glance over 11% of the company was sold short, and this number will add short covering (buyers) to the stock in the future as the credit crunch dissipates, the stock market zig-zags higher, the economy improves somewhat and inflation returns in 2010-2011.

The catalysts for recovery in REIT stock pricing will occur in three phases.  The first is already underway – reflation of the fractured banking and credit system.  Since February real improvements in commercial real estate activity and loan rates have been taking place.  The Federal Reserve and foreign central banks have finally provided enough liquidity to the system to encourage more confidence and a large rally in stock pricing globally.  As a result, REITs now have renewed access to the equity and credit markets to raise capital and finance/refinance loans at somewhat normal rates of interest.  With the relation effort, REITs should rise (and have risen) in value off of their close to bankruptcy valuations by Wall Street.  The prospect of recovery in the economy should also relate REIT stock prices, as rental income remains or grows instead of disappearing during the recession.

The second phase will start in 2010 as investors get serious about factoring in the rising rates of inflation that will surely result from all the money creation in 2008-2009.  Investors will be buying and hunting for strong inflation hedges for their money.  Why not own Colonial (or another REIT) that is levered to real estate assets, which will raise rents over time with the inflation, while their cost structure (debt payments) remain relatively stagnant?  Getting a high dividend payment yearly, in addition to the potential of substantial capital gains in a rising real estate price environment provides a win-win investment decision few other sectors can match.

The third catalyst for REIT ownership revolves around the possibility of hyperinflation in the U.S., or dramatic rates of inflation after 2010.  The odds of such a scenario seem to be growing in investor minds of late.  I have argued the last several months, that out-of-favor, dirt cheap REITs will generate much better long-term, total returns for investors than the over-hyped, over-owned and over-priced precious metals investments of gold and silver currently.  If I own a leveraged piece of real estate that doubles or triples in resale value quickly, that is using debt to equity of 2 to 1 or 3 to 1 or greater BEFORE the increase in prices, my ownership equity stake will see outsized gains vs. the rise in general prices on goods and services.  As an inflation hedge, REITs may be the BEST risk-adjusted game in town for investors looking to buy stocks, and Colonial (CLP) is in excellent shape to be one of the big winners in this sector the next 3-5 years.

-TigerPack

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#56) On June 20, 2009 at 10:45 PM, tifon (< 20) wrote:

Hi! Jake?, what about this thing you posted some time ago..."You can take CAPS with you that is!  Help us to test our new CAPS widgets which let you take Motley Fool CAPS player, video and editorial content to your web site or blog." thanks.

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#57) On June 22, 2009 at 4:08 PM, portefeuille (99.56) wrote:

#1-10: also see this.

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#58) On June 25, 2009 at 7:21 PM, irisid2 (< 20) wrote:

 This market does not give one the luxury of either "Buy & Hold"or don't B&H nor do stop losses work for ALL equities. .Your stop loss can sell you out on a VERY BAD Dow/Nasdaq DAY and then you have to wait 3 days before you can again buy same stock (which may then be higher than when it was sold)  or you can be cited for "Good Faith" violation ( as happened to me) Market NOW is just too volatile; however, there are blue chip  companies with share prices that were/are so inexpensive and dividends so attractive as to be foolish NOT to "BUY & HOLD"! There is a compromise ie. B&H some companies that you know HAVE to go back up and daily watch others carefully  , perhaps with stop losses.This strategy and much of your advice, with which I gree, is really applicable to those who manage their own portfolios ,as I do.Those who use brokers( most unsophisticates) are NOT buying and selling for $7.00 !

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#59) On June 28, 2009 at 3:16 PM, Vet67to82 (< 20) wrote:

Well, I have a different perspective on the market, on the prospects of inflation and risk, and on buy and hold.

It looks like Goldman Sacks (GS) individuals are pervasive throughout the financial sector and the gov't. I, and others, conclude the global metldown came about due to a lack of Honor, a lack of Integrity, a lack of Morals, Ethics, and Scrupples (HIMES) in the leaders of our USA gov't, business leaders, ... and that "state of mind" rubbed off on the rest of the planet.

GS was recently "ordered" by USA gov't individuals (speculate), even though the lease rates for gold are NEGATIVE since the beginning of June, to "knock" the price of gold down on or about June 18th. GS followed orders and knocked gold down ... and took the rest of the commodities and the market with it. Of, course, the USA gov't needed to sell their 100+ billion in "funding" the week of June 22 - 26 soooo, the manipulation is okay ... if it's the gov't?  ... AND ... what financial entity leases gold, diliberately, AT A LOSS (that's what WILL happen when the lease rates are negative) unless it IS manipulation?     I'd LOVE to lease gold and payback LESS. Sign me up!

One of the laughable ironies, is all the articles, writers and posters,  that argued Mark to Market needed to impose the WORST case scenario for "transparancy" in the financials ... are whisper quiet when it comes to the "opacqueness" of the gold market. There is NO transparency in the gold market ... you're always playing "catch up" to gov'ts and the market movers who are calling their game plan. Look at the damage across ALL sectors and to the market from June 18th to date ...

So ... how does one invest in a market, even a global market, ... he/she can't/doesn't trust?

Basically, you are reduced to day or short term trading. Investing rules, guidelines, etc are USELESS until everyone is assured the lack of Honor, a lack of integrity, a lack of morals, ethics, and scrupples is done, finished, baked, .... zip, nada, zeroed out.

We NEED financials and a gov't we can TRUST. It's YOUR money, YOUR tax dollars, ... your blood, sweat, and tears. Don't you think it's time to tell your elected officials that EVERY gov't employee ans business leader needs to conduct himself/herself within the US Constitution, within the LAW, and with Honor, Integrity, Morals, Ethics, and Scrupples ... or QUIT! Write and e-mail your elected officials .... ask your families, friends, co-workers and associates to write and e-mail. Otherwise .. we're all "gambling" -- and not one of us is/are "investing."

MFool ... there's your headline and multi- article stories on fixing that NEEDS to be done ...

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#60) On July 08, 2009 at 3:59 PM, nothingfunny (43.18) wrote:

Investing in proven companies that have been beaten down by the recent economic situation will show gains eventually.  Although you may have to hold them for awhile,, most of us can't retire yet and this gives us a chance to buy into companies that before this were too expensive.  Hold the right ones and you'll get paid someday :) 

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