Buy and Hold – Gimmick for the Lazy or for Fund Managers

1.4.10

Buy and Hold is an excellent way to make you stay invested even when the market is crashing. It’s an excellent way to help you stay calm during extreme volatility in the market. AND it’s exactly how you would have lost 10% over the last decade investing in the S&P 500 according to this Bloomberg article:

Bloomberg Article

Buy and hold works when an economy is in a growth phase and when measured over a long period of time. The US stock markets from 1982-2000 would be a good example of that – and if you want extend it, the US market from 1946-2000, with a flat period from 1966-1982 in between, was a long term example of this. China may follow a similar path of 10-20 year growth cycles with flat to down periods in between and perhaps some spectacular crash years randomly inserted. Mutual fund managers love to shout the virtues of buy and hold – perhaps because it keeps you from cashing out of their funds (which lowers their fees) during the tough times. Buy and hold also helps them avoid accountability when a manager can blame the market for poor performance (whether the market is at fault or not requires some analysis).

However, don’t be misled by the mystique of buy and hold. If you follow the records of investors who are considered prophets of buy and hold, such as Warren Buffet, you may be surprised. Buffet has no problem selling an overvalued asset or a mistaken purchase and, in some instances, has stated that he held on to some stocks too long. Read one of his biographies and you will see.

My bottom line point is that there is much more to the art of investing than simple throw-away lines such as “buy and hold.” If you don’t want to take the time to learn, then have someone else manage your money – but if you do want to learn, make sure you learn well – the market is an expensive teacher.

  • Boston AL

    Agreed. “Buy-n-Hold” is not an “all-truism”. It does not mean “Buy-n-Forget”. You should seek to invest from a “business perspective” -> when the price is right and the long-term potential is excellent, and sell when the future business potential no longer holds.