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Four Reasons Buy-and-Hold Investing Is Not Dead

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Buy and hold is the foundation of the market; value-oriented investors simply don't trade much.

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There's this mistaken idea trotting around in the popular media, which usually only shows its face in bear or sideways markets: Buy-and-hold investing is dead. This is wrong in several ways:

1. The average investor is horrible at market timing, tending to buy high and sell low. The more volatile the asset subclass, the more pronounced this behavior is. I have witnessed this personally while analyzing the return differences for Bill Miller, Bruce Berkowitz, and the S&P 500 Spider. There is a profound difference between the returns that a buy-and-hold investor receives and the returns that the average investor receives. The buy-and-hold investor almost always does better; the only exception that may exist is value investors; they have learned to resist price trends, painful as that may be.

2. The assets of the market are far less volatile than those that trade them. Bonds are issued; the grand majority of them mature (pay off). Stocks are issued, and they pay dividends, get bought out, fail, spin off another company, etc. Trading activity usually far exceeds the need for financing assets; it becomes a game unto itself, and a zero-to-negative-sum game at that. When you are playing a game that is overall negative-sum, i.e., the brokers suck cash out of the game proportionate to trading, the better players look for quality assets, and trade less.

3. When a sustained bull market arrives, the other mistake will show up: Buy-and-hold is the only way to go. Risky assets have periods of protracted increases in valuation. Certainty in the continuation of the process grows as it gets closer to the end of the cycle, when the cash flows of the assets cannot support the cash flows of those who borrowed to buy them.

4. Longer-term investors are often the key to a turnaround in the price of an asset. Asset prices bottom when longer-term investors see value, and buy and hold, waiting out the volatility. Asset prices crest when long-term investors decide to sell and wait, because the prospective returns to a buy-and-hold investor are poor.

This is why the perspective of a value investor can be valuable in approaching markets. Are you willing to do a cold hard analysis of the likely cash flows? You know that it gets harder to maintain high returns on equity (ROEs) as time goes on, and the same for low ROEs -- new management arrives, and there is mean-reversion.

Conclusion

Yes, there are clever traders, but by necessity they are few in the market ecosystem and repeatability is uncertain. There are far more dumb traders, and repeatability is only limited by their declining capital. Then there are the value-oriented infrequent traders. They do best, but second to them are those that buy and hold.

In general, the economy rewards those who bear risk over long periods of time. Thus buy and hold does well, usually, over long periods of time. That time period may be 30-40 years, however, and may not work well with respect to your retirement date, so take caution and don't trust in long-term investing as if it is the force of gravity. It is more akin to one who realizes that bean farming has become unpopular and so decides to plant beans. It might not work immediately, but it stands a better chance of working than chasing the current farming fad.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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