BUY AND HOLD, HOLD AND HOPE
The next in this series of reviewing trading styles is the age old adage of buy and hold. This of course is the running theme of the brokerage and money management business in the US. "You want to be a long term investor." Stocks have far out performed other asset classes so "you should just buy good solid companies and over time they will outperform." These are amongst the comments made by people who push this approach.
There are some merits on certain levels to some of these comments. Warren Buffet and all of his incredible success can hardly be challenged. He is one person. You cannot judge the whole lot by one individual. However, investing in solid long term companies, the brick and mortar so to speak, does have it's merits. If you have the foresight to know when all of these dips are coming and can buy only on the weakness, then just hold them indefinitely, you could have some success. Here is the problem with all of this. As you can see from the chart above which is a monthly SP 500 chart, since the early 80's we have had some incredible price swings. Very few individuals have the fortitude to buy into these types of declines, and even for short term timers like me, getting the lows is very difficult if not impossible to do regularly.
Due to this, most people do not buy only on these dips. If you do not your average price may not be so good with this type of approach. If it is not then you can find yourself 20 years into an investment, without much of a gain. There are dividends that can be factored in which do enhance returns. However, during periods of extreme stress, often those are suspended. When that happens it can dramatically effect the bottom line of your portfolio. If the time comes around when you need your money when one of these dips is happening, your whole life could be ruined. We certainly saw some of this the last 2 years.
The other thing that can obviously happen is the GM scenario. There are not many people who would have advised you 20 years ago to stay away from all the auto makers. I personally would not have even though I hate unions and grew up watching them support bad workers with low productivity. Yet had you had GM as a stalwart of your portfolio, that portion of it would have been wiped out. The problem with using indices like the DOW for example in computing historic returns, is that it's composition is always changing. Companies come and go from that average, and the values going back cannot always be refigured because some of the new additions did not exist 50 or 100 years ago. Due to this some of the %'s used in comparing stocks to other asset classes are not really accurate and can be very misleading.
One of the best ways to buy and hold is an approach based on some basic market timing techniques combined with buying value stocks at those times. For the most part, buy in the fall, Mid Oct or thereabouts, and pick 5 to 10 undervalued "blue chips" and hold them until May of the next year. At that point you sell them and buy a new group in October. This is a modified buy and hold approach, which can far out perform the basic approach. I did trade this way for a period of time with about 100k just screwing around, and did have some good success. However, the returns which were often in the high teens, were just to low for my taste.
I would rather miss a move, than sit through a wipeout like we saw in 2007. The truth be told, I got my Dad who is 82 and could not afford to lose any money, completely into cash in all his retirement accounts when the DOW was at 12,832. This saved him from having his life literally ruined and being a dependent on me. In summary here, the Buy and Hold approach I really think is fraught with danger. It can produce good returns over time, but is a very dangerous way to trade, not a safe way. Alot of people make excuses about being too busy etc to bother with their investments. Make the time! I am too busy to listen to you complain when you lose all your money because you "were too busy."
Employ some basic timing techniques to this theory and I think you will be pleased with how you can enhance your returns pretty nicely.