I wanted to put out some commentary on the “Buy and Hold” investing strategy. Like Elvis, it has a lot of fans, some who strongly defend their position and argue in favor of it. However like, Elvis, it is dead. Here is why.
In today’s markets, which I loosely define as year 2000 until present, market volatility has reached levels never before seen, due to a variety of things, to include computerized and automated trading, financial problems worldwide, debt and currency issues worldwide, and other things.
Our goal, as a TSP investor, is to make (and keep) money. So our goal, is to locate and identify trends and ideal entry points, and protect what we have (our balance) and what we have made. Nothing more. Our goal is not to get wrapped around the axle about why something goes up (or down), or P/E ratios, or similar matters. I do recommend a “big picture” understanding of the fundamental economic picture, but not much more past that. Again, our goal is to identify trends, the top performing funds/stocks, and get on the train. Nothing more. Lets take a look at Microsoft (MSFT) stock, one of the most widely held stocks amongst large mutual funds, such as those sold by USAA, Fidelity, etc. MSFT has been labeled as a well run company, with sound financials, and a near monopoly (up until recently) in the world computer market. Sounds like the ingredients for huge returns ?
MSFT has basically gone nowhere in ten years. Nowhere folks. So I bought it in 2002, and for ten years, have held it. Still, nowhere. Nowhere. Flat line.
Lets take a look at Amazon (AMZN) stock. For a large portion of this chart, AMZN was making profits but was viewed by skeptics as being a questionable business model.
Smart investors dismissed the “Wall Street experts” criticism of AMZN and observed that a new powerful trend was underway in 2002-2003. Again, the goal is to make money.
Put another way: Jim the trend follower and Larry the Buy and Holder/Fundamentalist are out fishing and Jim sees some lightning and thunder. Their goal is to not get rained on.
Jim: Larry, dark clouds and lighting out there. Lets head in.
Larry: Well, I don’t know Jim. Yes I see it, but I just can’t wrap my mind around what is causing that lighting and thunder. I watched the TV news and the weather experts didn’t mention this. Jim, I don’t know. Lets standby
(thunder getting stronger)
Jim: Well Larry, that stuff is getting closer, and look at that rain shaft over there. I don’t want to discuss rain science on the lake too much longer, we need to take action and respond to what is happening.
Larry: Jim, I am not convinced. I saw no mention of rain in the forecast for today, nor for tomorrow. And this is a strange time of the year for rain, kinda early in the season. You go ahead Larry, I am gonna hang back. I just don’t think its gonna rain.
Jim heads in to safety and stays dry. Larry subsequently gets hit by a lighting bolt and sinks with his bass boat to the bottom of the lake.
Lesson: Don’t be Larry.
Please listen to the following audio file (one hour-long) for additional discussion on Buy and Hold and trend following. Audio file courtesy of Michael Covel.
http://www.forbes.com/sites/jakezamansky/2012/07/05/the-death-of-the-buy-and-hold-investor/
http://www.marketwatch.com/story/buy-and-hold-is-still-dead-2013-03-28
Thanks for reading
– Bill Pritchard
