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Can We At Least Be Honest?



April 28, 2009 – Comments (24)

Yesterday I was reading an article entitled Don't Believe in Buy and Hold, but what I wound up not believing was what I was actually reading.

To be sure, anyone who's been around the financial press lately has probably read one or two pieces like this declaring that 'buy and hold' is dead.  Certainly for buy and hold investors such as myself, the current bear market has been rather painful -- and I've heard many stories of people capitulating, throwing in the towel, and eschewing stocks all together.

While I remain strongly convinced that buy and hold is the general strategy that works best for me, I'm willing to admit that it might not necessarily be the best strategy for everyone (though I'd contend it likely is for the majority of us who invest in stocks).  If we're going to criticize buy and hold, though, can we at least do it honestly?

Here are a few excerpts from the article, along with why I think the arguments made against buy and hold are, at the very least, woefully misguided.

The buy and hold devotees say you can't time the market, and if you aren't in all the time, you risk missing much of the gain. A Spanish research firm found that if you removed the 10 best days for the Dow Jones industrial average in the 1900-2008 years, two-thirds of the cumulative gains were lost. But if you missed the 10 worst days, it found, the actual gain on the Dow tripled. These results are in line with our earlier research and reflect the fact that stocks fall a lot faster than they rise.

While removing the 10 worst days may indeed have a greater impact than missing the 10 best ones, the author is assuming that the average investor has the power to do either one.  If one can't time the market, one can't time the market.  If you can, a tip of the ol' jester cap to you, if you're like me and can't, well, all of the evidence presented about the worst days compared to the best days becomes meaningless as our ability to avoid the worst days is no better than our ability to participate in the best ones.

We eschew the buy and hold strategy because of what's known in classical statistics as the gambler's ruin paradox. The odds may be in your favor in the long run--in this case, your stocks may provide great returns over, say, 10 years. But if you hit a streak of bad luck, your capital may be exhausted before that long run arrives.

First, the idea of the Gambler's Ruin when applied to positive expectation games (which is what investing in stocks must be, or else there's no reason to invest at all, be it buy and hold or any other strategy) only applies when, "a gambler who raises his bet to a fixed fraction of bankroll when he wins, but does not reduce it when he loses, will eventually go broke, even if he has a positive expected value on each bet."

That's a pretty narrow set of statistical circumstances.  Not only that, any investor who uses the above strategy is not engaging in buy and hold in the first place.  The above gambler is constantly varying the size of his or her 'bet' based on whether he or she won or lost the last one.  Such a 'gambler' in the stock market would be constantly moving money in and out of the market (placing different sized 'bets').  Not only does this narrow statistical example not apply, the principal behind it misses the mark by an equally wide margin.

The argument seems to be that with 'buy and hold' one runs the risk of a streak of luck so bad (a bear market so severe) that one's capital is completely wiped-out.  First, I've never seen the stock market as a whole, as measured by any broad-based index, worth zero.  So the idea of the gambler's ruin certainly does not apply.  Furthermore, part of buy and hold as I understand it is to continue to add new money to one's nest egg on a regular basis -- something which, again, renders the above gambler's ruin argument completely moot.

Or more likely, a severe bear market will scare you out at the bottom.

I bolded that one because it's probably the worst of the lot.  Buy and hold doesn't work becuase people won't follow the strategy and hold?  Delcaring a strategy broken because people might not follow it does not invalidate the strategy.

Our all-time favorite graph shows the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity. On March 31, 2009, that $100 was worth $16,656 with a compound annual return of 20.4%. In contrast, $100 invested in the S&P 500 at its low in July 1982 was worth $1,502 last month for a 10.7% annual return including dividend reinvestment. So Treasuries outperformed stocks by 11.1 times!

This is blatant cherry-picking.  If one invested in Treasuries when yields were at their peak in 1981 one will have outperformed stocks if one were to declare the 'race' over in the middle of one of the worst bear markets any of us have likely seen in our lifetimes?  Sure, Treasuries may have clobbered stocks in this narrow example (which seems designed to choose the starting and ending points that would precisely give Treasuries the biggest 'leg up' possible), but nobody ever said stocks will always outperform Treasuries over every time horizon.  A more honest comparison might be to compare the 20 year results of portfolios started on January 1st of each year beginning in, for example, 1950 (or any other date you want so long as we have a decent number of 'races' to compare).  Sure, Treasuries might have won a couple of those races, but without knowing the exact results I'd be willing to place a very big bet that stocks would have won the vast majority of them.

Yes, bear markets are no fun for buy and hold investors like myself -- and perhaps buy and hold isn't for everyone -- but if we're going to declare the strategy dead, or argue that people should not believe in it, at least we should do it honestly.


Russell (a.k.a. TMFEldrehad)

24 Comments – Post Your Own

#1) On April 28, 2009 at 12:24 PM, chk999 (99.97) wrote:

The financial cycles are a little bit longer than the human mind can deal with easily.  Somewhere around the bottom of a bear market is the best time to start a B&H strategy and is exactly when the press is calling it dead. Near the top of a bubble is the worst time to be buying for B&H and yet is exactly when the press will be talking about it the most.

Conclusion? The press is a contrarian indicator.

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#2) On April 28, 2009 at 12:39 PM, JTShideler (52.41) wrote:

If you give me 24 hours I think I could find a statistic to prove almost anything.  I dislike it when an author cherry picks statistics to prove a certain bias, so thanks for at least raising the question of intellectual honesty.

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#3) On April 28, 2009 at 12:44 PM, motleyanimal (38.35) wrote:

Investing is an unnatural activity for the human psyche. It requires more discipline than the average person can muster.

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#4) On April 28, 2009 at 12:48 PM, OctoStalin (33.81) wrote:

I used to find a stupid articles in the media annoying, now I think there great. Every trade has a sucker, idiots make you rich. People should buy bonds when stocks are popular and stocks when buy and hold is dead.


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#5) On April 28, 2009 at 1:16 PM, lemoneater (56.98) wrote:

Investing for the long term is in itself a useful discipline. A person is more likely to live within his means if he evaluates how much money he can have safely tied up in the market.

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#6) On April 28, 2009 at 1:18 PM, checklist34 (98.77) wrote:

related to animals comment, I think Buffet once said that it wasn't intelligence, but constitution that ultimately defined success for investors.

This is my first go-round on the markets.  My plan is not to buy and hold or to trade, but rather to buy in on every big crash and sell a few years later.  And sit on bonds in between. 

I sold my businesses last fall in part to buy into this bear market, and I plan to sell out of equities one by one or en masse as either the companies I have bought into seem to become fairly or overvalued, or the market seems to be exhuberant once again.  I reserve the right to change my mind on the fly, of course.

the human animal is intrinsically prone to creating boom/bust cycles.  This has happened before, this will happen again. 

if one bought only when the markets had literally crashed and sold after a few years...  what would the historical return be?

This is alot of work.  At least a full time job listening to conference calls, reading 10ks, running screen after screen, sifting through yahoo message boards and all of their BS for the few genuine nuggets of insight and commentary from the better posters.  I don't want to do this every year.  Just during big market crashes.  Look around for the stocks most irrationally beaten down, wait a few years, go to bonds, repeat a few years after that...

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#7) On April 28, 2009 at 1:27 PM, OctoStalin (33.81) wrote:

Checklist34, you could just buy some index funds, get roughly the same return and spend your timing enjoying life or working on something that could get you actually rich. Even if you make 15% a year it wouldn't make you a multi millionaire. A business could, as well as giving something to society rather than enriching brokers by trying to beat the crowd.

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#8) On April 28, 2009 at 2:41 PM, checklist34 (98.77) wrote:

octo, i'm no day trader.  I'm buy now, selling in a few years or as the companies I judged to be highly under-valued reach fair value. 

Its been so much work for me because I was unable to find professional help to really take advantage of the crashing market, and wound up choosing to do it myself.  Every.  Single.  Manager that I talked to talked about buying safe stocks like WNT or JNJ or AMZN, none of them were willing to jump into the mud and find irrationally slaughtered stocks.  So I invested about 2/3 of my money myself these last months, going from having no concep tof what FAS 157 was or waht a BDC was or how insurance companies work or even what a PEG was to having to make the decisions myself.  This is about 80% of the money that I have made in my entire life at work, so I felt compelled to take it very seriously and dig deep into it.

results:  professionally managed money is about even, which is good performance as the S&P is still down 8-9% from where I started.  I'm up about 80% or so.  Coming out of the last hole my biggest holdings were ASH, TCK, ACAS, XL DIN, and USG with lesser holdings in HIG (trimmed), BAC (gone), C (gone), GE (gone), DOW (adding to it still) and others. 

This is a one time deal as my business partner and I judged that the severity of the crash probably would offer a bigger potential return coming out of it than running the business through a potentially severe recession.  So far the plan has worked out pretty well...

My current plan is to plow a large sum into ACAS if/when they release news about lender negotiations and if the price is still severely depressed by then.  They have alot of upside and that one big cloud hanging over them.

Part of me wishes that we'd have gotten another big dip this earnings season, because I would be comfortable that the worst was through in that case.  This basically flat market through earnings season has me wondering if we'll see another down spike before beginning a long, slow crawl back up. 

I got nothing on the short term of the market, but I know that I bought my shares of XL for an average of 3 bucks when its enterprise value was negative 5 billion dollars.  Not too often will a guy get a chance to do something like that in life...  maybe its just as well that all the professional managers were scared witless. 

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#9) On April 28, 2009 at 2:44 PM, checklist34 (98.77) wrote:

and with respect to beating index funds... I don't think it takes any great insight or talent at all to beat the market over time.  Average into bear markets, average out of bull markets, focus when buying on stocks that are beaten down / cheap / out of favor.  As David Dremman taught in the only book on investing that I read before getting started, you beat the market by going against the grain.

Average into bear markets, average out of bull markets, don't try to time it beyond that and even if you never pick a stock in your life you should beat the market.  When the news screams murder and panic, average in.  When the news screams riches and glory, average out. 

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#10) On April 28, 2009 at 9:41 PM, cclogic77 (22.20) wrote:

Checklist, your story is very exciting and interesting. I only wish I was about 5 years older, out of college, and without student loans to pay off...

Good luck remaining diligent, and not letting good returns or a worsening bear market get to your head, whichever happens next! The current flatness of the market is slightly unnerving, I agree. A lot of people were expecting a decent pullback by now.

I personally feel that would be the hardest thing about investing (as I haven't yet had the chance to purchase any real stock), keeping your mind/psyche under check and not panicking or getting overconfident.

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#11) On April 29, 2009 at 1:30 AM, awallejr (38.05) wrote:

The real goal to investing is to ACCUMULATE wealth. You can't do that by constant trading.  The average person simply can't trade profitably, consistantly.  You may get lucky in the short run, but in the end the grind will kill most.  You can follow all the do's and don'ts, but trading involves short term predicting, and anything goes short term.

The real "trick" behind Buffet's success was that he accumulated wealth by investing in companies he thought were well run.  And with the accumulation of shares, he further accumulated the income derived off them, reinvesting that income further.

No one is suggesting buy, hold and never look at your portfolio.  You should always re-evaluate in case the thesis for investing into a given stock has changed. 

Try to find that one long term sleeper at least and keep accumulating.  I am sure many would love to have a repeat chance to have bought hard into MSFT in its early years, for example.  Checklist above wants to roll the dice with ACAS.  Gutsy, and might payoff (sure hope he bought alot when it was 58cents, I bought a few thousand shares myself and will just hold on), but try to set up a core holding position of solid, dividend paying stocks too (5 different diversified companies is enough).  Then keep adding to that core every chance you can.  It will be that core that will spin the income growth for further investment.


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#12) On April 29, 2009 at 1:33 AM, walt373 (99.87) wrote:

This article is such trash that it makes me mad. I can't believe people buy this stuff. I don't see anything higher than 3rd grader logic. Do these so-called financial professionals even study the history of financial markets? It's the same thing every single time:

1) boom

2) bust

3) repeat 1 and 2 five times or so

5) huge speculative bubble every 30-40 years when investors who weren't alive during the last one enter the market

6) crash

7) decade of low returns

8) press declares the death of any type of logical investing

rinse and repeat...

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#13) On April 29, 2009 at 3:09 AM, awallejr (38.05) wrote:

Please stop, walt373, your response is childish at best.  I doubt you were even around 30-40 years ago.  All you are doing is trying to be clever and nothing more. 

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#14) On April 29, 2009 at 10:23 AM, walt373 (99.87) wrote:

I'm sorry, I seem to have struck a nerve. Unless you are one of the people writing these articles, your attack on me simply expressing my opinion was uncalled for. You might not like my tone, but you don't make any points about what I actually say. You're right, I wasn't alive during the bubbles in history, but I doubt many readers here were during the 20s either. But anyone can read about it.

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#15) On April 29, 2009 at 11:40 AM, OleDrippy (< 20) wrote:


I respect your guts, but how can you honestly find a true valuation of a company, particularly ACAS when the books are loaded with accounting shenanigans, the executives deceive regularly, and the gov't cherry-picking financial winners and losers?

I'd be happy with 80%, for sure, but much like gambling, winning big initially can fill one with hubris and devastate a portfolio.

Good luck!

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#16) On April 29, 2009 at 5:25 PM, awallejr (38.05) wrote:

Walt373 you struck a nerve simply because of the arrogance of your reply calling the author's blog trash etc., justifying it with a ridiculously shallow boom/bust rinse/repeat reply.

Personally I like blogs that try to make relevent points with at least some thoughtful arguments.  Doesn't matter if I ultimately agree with the conclusions.  But if you are going to call someone out in their thread, keep the ad hominem's out of it.

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#17) On April 29, 2009 at 5:28 PM, TigerPack1 (33.53) wrote:

Kudos for an excellent post.

When you count reinvested dividends and adjust for inflation/deflation changes, the major stock averages (buying and holding) TROUNCE any and every investment strategy over any and every 15-20 year period you choose to view, over the past 100 years in the USA!!!

Even better, look at a buy-n-hold strategy after any and every multi-year bear market, and you do EVEN better.  Guess what folks 2009 has provided the best opportunity in your lifetime to do the buying if you are under age 50 currently.  In 15-20 years, you will earn significant "compounded" sums on your 2009 investment that will make bonds, cash, gold and commodity returns look foolish.

Perhaps only REITs and sound real estate investments using some leverage (debt) will provide a better overall return the next decade or two as inflation rates rise considerably with all the money creation of late.

After owning your house with 5% long-term debt/money and say a 20%-25% downpayment/equity stake, I would buy some indexed stock mutual funds and a basket of REITs today, to achieve a MUCH BETTER than average, buy-n-hold return on your dollar the next 15-20 years.

-Tiger's Two Cents

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#18) On April 29, 2009 at 8:41 PM, walt373 (99.87) wrote:

awallejr, I was actually agreeing with the author, and was calling the article "Don't Believe in Buy and Hold" trash.

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#19) On April 29, 2009 at 8:56 PM, awallejr (38.05) wrote:

Ah, then I apologize, I read as an attack on the author.

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#20) On April 29, 2009 at 11:18 PM, EnigmaDude (52.85) wrote:


Another great post, and I mostly agree with you (not the article).  In my Roth IRA my strategy is sort of a combo of buy-and-hold with high-yield bond funds and ETFs as well as a couple of invididual stocks that pay dividends.  Then I supplement those picks with speculative growth stocks or "value" stocks which I may trade in and out of using a swing trade type of approach.  The strategy is working to some degree, although I have also gotten impatient a few times and sold some shares too early (like YGE).

I reinvest my dividends and the profits from my trades to either acquire more "buy-hold" shares at a lower cost or to pick up some under-valued shares of a growth stock that I believe have a better than average chance of going up at least 20% from my buy-in price.  I just did that with VPHM, for example.

My CAPS portfolio has been somewhat of a testing ground for both types of picks, and I got hammered last year so now I'm trying to make up lost ground.  I have learned that I am much better at picking outperforms than I am at picking under-performers, but at least I am refining my strategy and attempting to adjust to the market's quirks.

I guess you could call it an active buy and hold strategy.

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#21) On April 30, 2009 at 6:40 AM, foolsMeThrice (99.46) wrote:

Do they mean 200% return or 300% when he says gain tripled?

Anyway assuming he means 200% return... ten worst days removed it tripled.

Ten best days removed, it goes down by two thirds which means your left with 1/3.  The inverse of 1/3 is 3 which is the gain required to achieve break even which is 200% return.  There is no difference.

I found this Ten Best Days and Ten Worst Days.

And like I thought they mean 200% return.

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#22) On May 01, 2009 at 1:39 PM, mtinvest (95.41) wrote:

For someone who follows a buy and hold strategy you sure have made a lot of picks in April.

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#23) On May 02, 2009 at 6:06 AM, portefeuille (98.88) wrote:

This "taking away days" discussion is really unnecessary.

Let us assume you are invested 100% on Tuesdays and 0% all other days. Let us further assume that the value of the always-invested-portfolio can be well approximated by something like this

a_always (t) = exp(b*t) (see the red line here).

Now what would be the approximation for the only-on-Tuesdays portfolio?

It would be

a_Tuesdays (t) = exp(b*t/5).

That's it.

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




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#24) On May 02, 2009 at 8:25 AM, nullDevice (< 20) wrote:

mtinvest, I don't see the conflict between being a buy-and-holder and making a lot of picks lately. Valuations in March - April have been very attractive on a historical basis. This is a good time to be picking stocks. Buy and hold does not mean ignore valuation.

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