Buy And Hold

Instead of trying to figure out when to sell, just keep buying stocks that give good growth over the long run (say 5, 10, or 15 years). This strategy relies on the natural tendency of the stock market to grow over time. It almost always outperforms naive BuyLowSellHigh strategies in the long run because it is too hard for most people to predict short-term selling strategies, but it is relatively easy to predict long-term growth stocks based on past performance.

It also relies on the buyer having a steady source of income (i.e. a job) to continue buying.

The naive BuyLowSellHigh approach is particularly poor if heavily chart-based - instead, one needs to be good at judging (and taking into account) the economical and political situations of the time, and good at balancing risks.

The major problems with both BuyLowSellHigh and BuyAndHold is that both are simplistic strategies, and often blindly applied. BuyLowSellHigh is one good strategy, the trick is in knowing how low is low and how high is high. BuyAndHold is also a worthwhile strategy, but again requires thought about how long to hold. Too many people think high is the absolute top of the market and low is the absolute bottom, and if you miss either, then you "lost" money. Similarly, hold means forever. The only approach that will make money over the long term is an active, but not too active approach. The day you buy, start planning to sell. Picton Davies said about the market "There is money for the bulls and there is money for the bears, but there is nothing for the pigs."

BuyAndHold: This was a strategy that many baby-boomers lost 80% of the value of their holdings from the last high point. To sell a well chosen stock at above the purchase price, or before it hits rock bottom if it is on the way down, is always a good strategy. The cash from such a transaction can be used when the stock reaches a low point and gives strong indication of increasing its value. It could have resulted in as much as 5 to 8 times as many shares of the otherwise "held" stock. (Now -- February 2003 would not be a bad time to utilize such cash, if you were smart enough to have sold somewhere near the high). ( I have made over 40% in just the last 6 months using such a "poor" strategy.) (100 to 120 dollar stocks bought and held are now worth about 10 to 15 dollars - do the arithmetic - you could buy now nearly 10 times as many shares)

BuyAndHold is a good HeuristicRule but not optimal and does not supplant wise investment. Many people, not being financially talented, leave the strategy to their mutual fund managers. Instead of BuyAndHold individual stocks, they BuyAndHold mutual fund shares.

Investing in actively managed mutual funds may be a (heavily marketed) antipattern, as most of those perform worse than passively managed index certificates, but are much much more expensive (load fee, management fee etc.).

Read

The Wealthy Barber

ISBN 0773762167 for one proponent's view of BuyAndHold. "The lessons are basic and conservative. No day trading here or get rich quick schemes. Seasoned investors will probably find this book too elementary and simplistic. But some knowledgeable investors might find it to be a refreshing, thought provoking, simple overview. The primary reader target is really the novice or the uninformed."

Why does everyone concentrate on buying? Don't buy unless you have a selling strategy as well.

Until a generation ago, most stocks paid substantial dividends. Many people (and institutions) bought stocks, held onto them, and lived off the dividends. Many people only sold stocks if they were forced to (e.g., by a corporate takeover). This pattern was reinforced by the adage "don't live off your capital", and by very high expenses to trade stocks. Stock brokerage commissions and capital gains tax rates were both much higher (at least in the United States).

Not so true in Britain, though, where there has been a similar imbalance. Anyway, a generation is more than enough time to recognize the need for a balanced, properly-informed investment strategy.

Buying, Selling and Holding are not to be entered into lightly and should be based on more than popular investment advice. If one would be successful in investing, one must know the environment, strategies and risks involved. Just as anyone can write a simple Basic Program, one can offer SimpleSolutions?. BuyHold? is a SimpleSolution? designed to minimize involvement and understanding. If you had practiced this strategy in Mid 2001, you could have lost 90 percent of the value of your portfolio. Where did it go?

Into the hands of those who know what they are doing and who propagate this fallacious strategy. It is like saying to the investor - put your money in, we'll take it out during the bear market by selling your shares over and over again (selling short - or selling shares they do not own) during the downturn, then buy them back (cover, replacing the shares they never owned). Then they repeat the process over and over again during the bear market. When the bear market is over, they have the money which represents (in this last bear market) 9 to 10 dollars for every 1 dollar you have. Where did your value go? Short sellers made the money, while you lost value by practicing their "Buy and Hold" strategy. They practiced "SellAndBuy?" at the expense of your "BuyAndHold". Figure it out, you lost out because you believed the "Long term value" of the BuyAndHold practice while the "wise investors" in the short term used intelligence and business sense which in effect captured your losses.

If you want to blindly trust some strategy, go to you savings and loan and deposit your money for 1 or 2 percent gain, through the long term. At least you know there that they are using your money and value to make them money. At least there you don't have the added insult of them making 900 percent while you lose 90 percent.

The BuyAndHold strategy says "This will make you money in the long run, and you will not have to think about your money". What it really means is "Buy at any Price" and Hold on, the real gains will be made by those who think about their money and who "Sell Losers", then buy and cover, pocketing the money you lost.

To be preferred is the strategy which buys stocks that have potential and are gaining value (Buy Low) and selling stocks that have less potential and are overvalued. (Sell High). This is the opposite of naive; it requires the investment of your intelligence with your money. The BuyAndHold is naive, trusting in a historic "You'll gain in the long term", forget about thinking about your money and studying, and becoming more knowledgeable. It naively trusts that others will be more concerned about making money for you than about making money for themselves.

All I can say is, don't criticize something you don't understand. Your claim that "you could have lost 90 percent of the value of your portfolio" is just wrong (see example on BuyLowSellHigh). BuyAndHold is only naive if you buy as much as possible now and hold it all forever. If that's what you think BuyAndHold is, then you don't understand BuyAndHold. What's really naive is to believe that BuyLowSellHigh is good advice for everyday people.

I have criticized something I do understand. I did in fact practice what I here preach. On a day in 7/2000 after having purchased 100 shares of a stock (Nameless Tech) for 80 a share, thinking it was going to go up even more. It did in fact go up an additional 5 to 84 in a short time. But later to my dismay It began to plunge. In October of that year, it was at near 70, I felt it was time to sell. Even though I was destined to lose 1000. I sold at 69.625. During the next week it went up to 70, I thought to myself (did I goof) should I get back in? I followed my earlier instincts and held the cash. Three weeks later the stock was at 45.875. It continued the decline to a point where shares were selling for nearly 50 cents. I lost 1000 dollars instead of 7950! If BuyAndHold had been my strategy, I would have today around 400 dollars, (It has since recovered a little). I had a second similar experience where I avoided losing 1/2 the value of my investment by selling a loser at a slight gain, while it was higher (relatively). I do believe that people should exercise at least the same concern in investing in the stock market as they do in their other financial transactions. The fact the "everyday people" do in fact BuyAndHold and do so blindly is evidenced by the bottom line of their 401Ks and even their Mutual funds. When the baby-boomers reverse that and cash in their 401Ks and Mutual funds, you will witness the result in real cash value results. Was it a good strategy? We shall see. What's really naive is to believe that BuyAndHold at any price is a good strategy, for anyone! Except those who can profit by it at no expense to themselves as illustrated in "short" selling.

BuyAndHold neglects one of the most important considerations in the execution of stock transactions and that is "timing". In BuyAndHold, the assumption is that "all" times are good times to buy, and that if you continue to buy you will have gained when you eventually sell, at a time of your convenience. That is just plain "wrong".

This will be demonstrated quite forcefully when those sales begin to be made in the near future by the retiring "baby-boomers" who opted out of managing their financial investment affairs by practicing the "BuyAndHold" strategy of non-involvement in their own affairs. The short sellers will have some of the most profitable days of their lives then. Timing is important and those who neglect it will pay the price by forfeiting their potential gains to those who "understand" it has major importance in investment. BuyAndHold neglects timing, BuyLowSellHigh includes timing. That "Everyday People" could benefit from such a strategy but do not, is the reason it should be SHOUTED LOUDLY and LONG by those who can profit most from its adoption.

I wonder where "everyday people" would get this valuable timing information...

I suppose if you mean by everyday people those who do not listen to or view financial news, read such papers as the WallStreetJournal? or Barons, or who do not know what they own or how much it is currently worth. They will only get the valuable information by paying attention to these things by setting aside some time to do these things.

Or put another way (a stock index) 105, 102, 105, 110, 140, 150, 140, 160, 180, 210, 240, 250, 290, 310, 270, 230, 240, 220, 180, 160, 145, 120, 110, 102, 105, 101, 110, 130, 140, 130, 140, 150, 155. A ten year old can find the high (310) and the low (101). They further could tell you when thing are going down and when things are going up. It isn't rocket science. If your timing is off by two, in selecting when is the high, and you select the high as 250 or 230, and you are off by two in selecting when is low, as 102, or 130, the BuyLowSellHigh Difference is at least 100 points and possibly as much as 148. This is a significant advantage over BuyAndHold. Timing is important. Especially the timing of a sale. Make sure you are in control of this important factor.

You keep missing a few points in favour of BuyAndHold. 1) Most people don't have the expertise to safely predict the stock market. Heck, most professional investors don't either, as indicated by the famous 'dart board' experiment. 2) Most people don't have big sums of money to throw around. They've got a few hundred (if they're lucky) per month to play with. 3) Most people aren't willing to risk their retirement on being 'off by two'. In short, most people want a fairly simple strategy that takes advantage of the stock market but doesn't risk losing their shirts.

And again, I feel I should point out that your claims about buy and hold are wrong: "If BuyAndHold had been my strategy, I would have today around 400 dollars". If you had been practicing buy and hold, you wouldn't be as well off as you are following your strategy (which I admit is better if you can take the risk and subsequently pull it off), but you would certainly have more than 400 dollars (see below). Even your example sequence (105, 102, 105, 110, etc.) gives a modest 5.4% growth from a BuyAndHold strategy.

Example copied from BuyLowSellHigh, since it's directly relevant here and probably actually belongs on this page:

The key phrase there is "could have happened". BuyAndHold is not 'buy as much as you can right now and hold it forever', it's 'buy a little bit right now, and keep buying a little bit each month, and hold it until you retire.' It's not for hardcore investors, it's for everyday people who want to take advantage of the stock market without getting killed by it. Let's take your example above. Naive buy-and-hold would buy all at once at the beginning ($8000) and end up with $300 after a bad market crash. The super-prognosticator strategy would be able to squeeze by with a small loss ($7800 in 2600 shares). BuyAndHold can't do as well as that, but it can at least make the loss more respectable. Instead of buying 8000 right away and waiting 25 months, buy 320 each month for 25 months. The total expense is the same (not to mention it's easier for most working people to afford $320 a month for 25 months instead of $8000 right now), but the net result is a big improvement:

 DatePriceBuyHoldValue
 Jun-01804.04.0320
 Jul-01704.68.6600
 Aug-01605.313.9834
 Sep-01506.420.31015
 Oct-01408.028.31132
 Nov-013010.739.01169
 Dec-0128.111.450.41415
 Jan-0226.212.262.61639
 Feb-0224.313.275.71841
 Mar-0222.414.390.02017
 Apr-0220.515.6105.62166
 May-0218.617.2122.82285
 Jun-0216.719.2142.02371
 Jul-0214.821.6163.62422
 Aug-0212.924.8188.42431
 Sep-021129.1217.52393
 Oct-029.135.2252.72299
 Nov-027.244.4297.12139
 Dec-025.360.4357.51895
 Jan-033.494.1451.61536
 Feb-031.5213.3665.0997
 Mar-032.3139.1804.11849
 Apr-032.5128.0932.12330
 May-032.7118.51050.62837
 Jun-033106.71157.33472

The prices are extrapolated from your example. At the end, our investor has about $3500 in 1160 shares, a modest loss considering the nasty economy, and far better than being stuck with $300 dollars. Better still, this took almost no thought on the part of the investor. As long as the stock eventually recovers, the investor will recover. If the investor stops at this point, the recovery price will be $6.91. Since betting on a single stock is pretty risky (if it never recovers, you're out of luck), the final piece of the buy-and-hold puzzle is to stick with mutual funds. Sure, it's not very exciting, but we're not talking about big money, just enough to retire on. BuyAndHold is definitely not a short-term strategy, it is inherently long-term.

Examples of buy and hold in the long term: If you had invested in Microsoft (http://finance.yahoo.com/q?s=MSFT&d=c&t=my&l=on&z=b&q=l) starting in Jan 1990 until Jan 2003 at $100 per month (today's value), you would have invested $15 700 and now have $106 309, an annual rate of about 15.8% (even though Microsoft has gone from $58/share to $25.6). If you had invested the same in Intel (http://finance.yahoo.com/q?s=INTC&d=c&t=my&l=on&z=b&q=l), you would have $58 794, an annual rate of about 10.7% (even though Intel has recently gone from $74/share to $15.6). Considering that the economy is going to recover in the next few years, that rate will end up being even higher. The question is not how long to hold (you hold until you retire), the question is can you pick a good long-term stock. The answer for most people is to leave it up to a mutual fund manager. Find a respectable mutual fund and you're set.