Buy and Hold is a Myth
graduatedtaste.com
graduatedtaste.com
Of course there is a difference with trading and investing, but there’s one thing that the two have in common: risk management. If you’re investing for the long haul, you still need to have stops in place and contingincies written out.
I love the idea that stop-loss orders are somehow part of 'investing'. So here's your scenario: you are analyzing ABC Co., which trades at $5. A careful assessment of their assets, growth prospects, and management makes it clear to you that the stock is probably worth $10. So you buy at $5. The next day, a well-regarded technical analyst announces that the stock has done a pigeon-toed triple-flopped oat-and-tree formation, and is destined to take a Fibbonacci retracement. The stock drops to $4.00. Suddenly, your 'risk management' system tells you that this stock, which you had purchased for fifty cents on the dollar, is a worse deal because it now trades at forty cents on the dollar.
This is like getting rid of all your clothes because a clothing store had a sale.
If you're buying because you think you're getting a good business at a fair price, the daily quoted value only tells you whether you can buy more at a good price, or sell some at a good price. It doesn't inform you about business prospects, or changes in the underlying value.
Also, buy-and-hold is a myth because of one cherry-picked anecdote? Look at a thirty-year chart of KO, PFE, MO, WMT, and, for that matter, BRK.A.
Making good investments is extremely hard. Making satisfactory investments is not nearly so hard. But adding in a bunch of gibberish about managing risk by selling when others panic will never help anyone.
1) Stop-loss orders should be part of an investment strategy. Sometimes, with all your analysis, you can be wrong. Do you plan to risk your entire allocated capital if the stock goes to $0? Do you decide not to cash out in order to find better deals? If that's part of your plan, fine. The point is people don't have plans when they invest.
2) Selling a stock when it's dropped a dollar is not a good risk management strategy. O'Neil reccomends no more than an 8% drawdown on capital for larger stocks (a $5 stock is a different example).
3) Selling because someone else told you that the stock did a pigeon-toed tripple-flopped oat-and-tree formation is not good risk management. Although that is a viable pattern ;)
4) If a stock dropped and you are still convinced of its value, then average in. Of course this should have been part of your plan to begin with.
5) My rant was about not taking profits if a security doubles. That's dumb, especially in allocation strategies (which I mentioned near the bottom of the post).
6) You speak of value investing. That's a good strategy, but not the only strategy.
7) Buy and hold is a myth because people don't look beyond that. There's no contingency. Even Warren Buffet has contingincies (in which he just flat out buys the company so he can fix it).
8) And this post wasn't even about stock picking (your buy and hold examples are stocks) this was an ETF.
2) Why 8%? Why not for low-price stocks? What about for stocks traded overseas (5 Yen? 500 Yen?)? It all sounds very unscientific -- and I've read O'Neil's books.
3) I didn't say that this involved selling then. That call caused the stock to drop in my example. Then the drop caused the stop-loss sale.
4) Average in before or after getting stopped out?
5) Why are you viewing the price quote isolated from the business value? If the stock is up 100% because the company is worth more, selling is not that wise. If the company triples in value (e.g. a new patent, a competitor going under), the 100% rise in price is not a good excuse to sell.
6) Value investing is when you try to buy something for less than it's worth. Usually, a strategy of paying 110 cents on the dollar can't get by with the claim that it's just another "strategy", even if the plan is to flip it to someone else for 120 cents on the dollar. When you rely on an infinite supply of subsequent suckers, it's very probable that you will some day be the last sucker.
7) "Buy and hold" doesn't mean "Buy and hold forever." It means that your bias should be towards sticking with a few good investments, rather than playing lots of markets. In general, if A's strategy calls for one good idea a year and B's strategy calls for ten good ideas a month, A will have devoted 100X as much effort to his average idea (and will be paying much lower taxes!).
8) So? When you purchase shares of many businesses at once, instead of one, are you exempt from behaving in a businesslike manner?
2) 8% is an example from William O'Neil for large cap domestic stocks. That's his number; it's up to the investor to define their own plan. Percentage moves in lower dollar stocks are greater than higher dollar stocks. (It's easier to go from 1 to 2 than 20 to 40).
3) Calls in Technical Analysis rarely cause the stock to drop.
4) It's all part of your plan. Your original example of getting out when a stock drops a dollar is not a good one. If a stock you bought at 40 goes to 30, would you get out, or add more? What about 20? 5? You need to have a plan. That was the whole point.
5) Great question. If the stock is up 100% because the company says their worth more, should you sell? My example ($BKX) is a great example because the fundamental valuation that the banks gave us for the past 2-3 years were misleading.
6) It is a viable strategy if it produces a positive expectancy. That being said, most people can't get an edge in trading. However, you do need to have contingencies when investing.
7) That's the point I was trying to make! It's not buy and hold forever... but what's your timeline, or your price point?
8) Stocks and ETF's have different risk characteristics.
When people invest (and at this point in our discussion, I'm talking about specific stocks or focused ETFs) they are not always right. What do you do when you aren't right? Do you blindly hold on to the stock, waiting for that bounce? If you don't have a set risk management plan, then you will panic.
Similarly, what if you are very right and one of your picks doubles. Are you willing to risk all of your gains in the future or are you going to protect profits?
The whole point was to show how risk management and capital preservation is a necessity when investing (or any business venture). To deny that is a serious mistake.
if you want to maximize your profits, sure, buy low and sell high, and repeat. this takes time to learn how to do well, though, as well as to perform the strategy.
if you don't have time or the knowledge or the stones or the money to lose as you learn lessons to play the market game, buy and hold index funds or solid dividend-paying stocks.
If it's possible at all. If you believe that markets are efficient, then it's not. Even if they're not efficient, it may be impossible to exploit the inefficiencies because of the taxes and trading costs. Buying and holding an index of stocks historically outperforms an average actively managed fund, and past performance of a fund is not a predictor of future performance (so it doesn't help to buy funds that did well in the past.)
however, thats what they do. its their job. i'm not interested in doing that for a living, and i feel like most people would agree. i'd rather make money doing the stuff i enjoy and throw my investments into something i know will generate me extra revenue without having to worry about it.
The market may be 'efficient' in the sense that people inclined to do research have a fair tradeoff between time spent researching and the benefits thereof. But it is incoherent for the markets to be perfectly efficient, in the sense that investors are able to rationally appraise the value of every single stock, but are fully incapable of appraising the value of their own time.
I wonder if we will get to the point that publically-traded companies will have to be perfectly transparent, and the needed research will be trivial (and automated)?
And I never said that people shouldn't create a passive portfolio. If you want to put all your money into a broad based market etf, fine. I wansn't knocking on that.
This wasn't a matter of selling high. This was a matter of an etf doubling and people getting greedy.
This assertion is totally bogus. Its not even a manipulation of statistics, just an out of context graph in a nonsense argument. Swing and miss.
Like I said in the post, if you've want 5% of your assets exposed to banks, and the etf doubles, then your exposure is now 10% of your portfolio. You should start paring off to reduce your risk to that particular industry.
Even with broad based index funds aren't completely diversified. There's no hedging against currency, inflation, and taxes (i.e. muni bonds).
If you are to build a passive portfolio, get a friend that works in the High Net Worth section of a broker and get the allocation sheet from them. There's an ETF for every category.