The Death of Buy and Hold?

Last night, the Fast Money crew talked about the death of buy-and-hold investing. I agree that as a strategy, it’s in intensive care, but I’m not so sure it’s quite dead yet.
First, whenever people start talking about the death of something, particularly with investing, it often the moment it’s about to surge. The classic example of this is Business Week’s “Death of Equities” cover from 1979.
The other reason for my skepticism is a misunderstanding of the arguments for buy-and-hold. I often hear people say, “Ha! The market’s down! Where’s your buy-and-hold NOW?” Well, the case for buy-and-hold isn’t that the market always goes up. Rather, it’s that buy-and-hold beats anyone else’s ability to time the market consistently, successfully and in a practical way. It’s that last part in italics that’s often overlooked.
If you can time market successfully, fine. Go do it. In my opinion, I’ve never seen anyone who can do it consistently, successfully and in a practical way.
The other part of buy-and-hold obviously depends on what you buy and what you hold. Since I don’t believe in efficient markets, I don’t see buy-and-hold as synonymous with index investing. Many do. I think it’s certainly possible for investors to make reasonable decisions that will lead them to beat the market over the long haul. For example, if you had taken some basic steps like underweighting large-cap tech stocks at the height of the bubble, you’d be in far better shape today. Small-cap value stocks have had a pretty nice run over the last ten years (except for the last three months). This year, I avoided energy stocks and large-cap financial stocks, and it’s served us well.
There’s also the issue of how long to hold a stock. I don’t see the importance of holding a stock forever, but I do see value in holding them for a considerable amount of time. Each year, I change five out of my 20 Buy List stocks. That’s translates to an average holding period of four years, which seems reasonable to me, though I can understand some buy-and-hold purists objecting.
Lastly, there’s also the issue of how long it takes a stock’s performance to reflect its true value. I think this may be one of the least-understood topics in investing. I’ll give you a brief summary. Let’s say that the stock market gains, on average, 0.05% a day with a daily standard deviation of 1%. (These numbers aren’t accurate. My point here is descriptive. I’m also aware of the problem of stocks returns and the normal distribution, but I’ll out that aside for now). That means that 95% of a stock’s daily move is simply nonsense. It had zero bearing on the stock’s true worth.
After 25 days, more than a month of trading, the stock’s average return should be 1%. The standard deviation, however, is now 5% (note: this rises by the square root of the number of days). So even after one month of patience, the noise value has dropped to 83%.
At 625 days, or nearly two-and-a-half year, the average return and the standard deviation are both 25%. This means that even after holding a stock for 30 months, it’s perfectly reasonable to expect a loss or a minimal gain.
As I mentioned before, I used those numbers for descriptive purposed. The real figures would show that even more patience is required. Buy-and-hold could be dead, but the evidence isn’t close to be full. The bottom line is that the long-term advantage of holding stocks is real, but it takes a long time to show up.

Posted by on November 11th, 2008 at 12:34 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.