2009-06-29

Buy and Hold? It Depends.

This morning I read Five Reasons Why Buy-and-Hold is Dead and Buy and Hold Dead? Um...No
I think they are both right. "Why Buy-and-Hold is Dead" is a dead-on analysis of changing market structure, investor access and psychology. A quick check of Smita Sadana's checklist:
1. Easier access to brokers, cheaper commissions, and the rise of ETFs.
2. Easier access to information and susceptibility to peer pressure.
3. The world's accelerating rate of change has created the perception of increased risk in buy-and-hold strategy.
4. Once beaten, twice shy: buy-and-hold versus “buy-and-forget.”
5. Loss of faith in the markets.
Read the whole article. My take on 1 and 2 is that structural changes have weakened "buy and hold". When you had to go through the act of calling your broker or going in for a visit, this slowed the investment process. Now, you can make a decision in seconds. Socially speaking, what is more trendy, sitting down and reading a book or "Tweeting"?

3 and 5 get to the psychological change. "Buy and hold" is dead because investors burned by losses will fear getting burned again. They will sell their winners and losers more quickly in future.

4 is more of a general critique on "buy and forget", where investors buy a stock and hold it forever. GE's plunge from over $60 in 2000 to under $10 this year comes to mind.

The immediate thought when I read that "buy and hold" is dead is that "buy and hold" is now an increasingly good strategy. It was a bad strategy near the market peaks because how are you going to reap profit when you're buying at the top? And one of the reasons there is a top is because everyone is buying and holding. There is great demand for stocks, but not a lot of supply (although there was new supply via IPOs).

Todd Sullivan gives a great example of when to "buy and hold". It almost all depends on price:
I'm going to take a look at the longest holding I ever had...Altria (sold last December).

I bought it in late 1999 in the midst of the "Master Settlement" and Chapter 11fears for them. The buying thesis was simple:

1- Addicts will buy their products
2- They can't go Chapter 11 because those suing them (States) need the money they provide
3- Because of that, their long term health was assured.

The purchase price for Alria was $21.65 a share and when I sold it was $16.75. In addition to that I received $21 a share in the Kraft (KFT) spin-off (sold immediately), $48 a share in Phillip Morris International (PM) shares (still held and today worth $42).

Oh, and over the 9 years I held it I received $23.25 a share in dividends.
First off, notice he did not "buy and forget". He exited in December. The key factor is the price—he purchased at a time when people thought Altria would declare bankruptcy. He goes on to say:
Has the market done a round trip the past decade? Yes. Are there plenty of companies whom over that time have gone up/down and then back to start? Yes. BUT, if you buy it low enough and pay attention to its business environment/prospects to determine your selling time, you can avoid many of the losses.
And most importantly, as Ms. Sadana rightly points out, "buy and hold" has lost popularity. You want to be selling to "buy and hold" buyers at the peak, and buying from "buy and hold is dead" sellers at the bottom.

Disclosure: I also sold MO last year, and still hold PM and KFT. I first purchased MO in the mid-1990s. I still hold Coca-Cola (KO), first purchased in 1994. And yes, I was stupid not to sell at $80 in the late 1990s. Live and learn!

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