Is Buy and Hold Dead?
Here’s a nice piece of research from Richard Bernstein of Richard Bernstein Advisors. He offers the antithetical view of today’s high frequency trading mentality/environment and claims that buy and hold isn’t at all dead. Bernstein just says it’s misunderstood:
“Buy-and-hold strategies typically do perform well, but their success is predicated on buying and holding the correct assets. Having exposures to the correct market segments is called beta management, and investors tend to be very poor beta managers.
“Stocks for the long run” was the theme of the late 1990s and early-2000s, and investors were encouraged to buy-and-hold S&P 500 index funds. That seemed to make sense to them at the time because the US stock market had just finished one of its most successful performance decades in history. As a result, investors preferred US stocks. Unfortunately, US stocks subsequently underperformed.
Chart 2 shows why investors wanted to accentuate US stocks in their portfolios at the beginning of the 2000s. Chart 3 shows what actually happened in the subsequent ten years, and why investors perceive that there was a “lost decade in stocks” and that “buyand-hold is dead”. However, if one had bought and held emerging market stocks in 2000 rather than US stocks, one would be very happy today. If one had bought and held BRICs, one would be very happy today. Buy-and-hold has continued to be a viable investment strategy, so long as investors bought and held the correct stocks!
Ironically, many investors today seem to be following the same formula they followed last decade, and are again buying and holding the prior decade’s winners. In our opinion, these investors are positioning their portfolios for another “lost decade in equities”.”
Read the full piece here.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
9 Comments
Great insight. Buy and hold works best if you only buy and hold stocks that are going to outperform during your holding period. I suggest searching for stocks that will double each year with 100% probability. This advice was free, good luck.
Perfect comment.
So what assets have not done so well over the last ten years that should be held? I’m tempted to say emerging markets like the BRICs which are down recently, but what does Bernstein really think we should hold Japan?
yes, this is an almost useless article, accept for highlighting the fact that “stocks for the long run” is nonsense unless long>30 years or so. when enough people will hate us stocks, and multiples will compress to single digits, only then the next bull market in equities will be born.
This is complete nonsense. Of course “Buy and Hold” makes sense if you can anticipate the winners over the next decade. In a way, this is what Graham and Dodd investors do, but the there are very few real and good Graham and Dodd investors out there. However, the common idea of buy and hold is to hold a generically diversified (dumb) portfolio without trying to guess the future winners. This last one would be considered some form of “market timing”.
(Dumb) “Buy and Hold”, as exposed in Jeremy Siegel’s book, IS dead, and in fact it should have never been alive, because it is based on flawed historical data analysis.
I have been beating on this topic over the past couple of years (see here again http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1904992) and continue to discuss because bad habits are hard to die.
Ben Graham did not subscribe to the Buy and Hold method. His method was to purchase a diverse range of undervalued stocks and he states that you should sell it if it goes up 50% or sell regardless of what the price was after 2 years.
I think it is more accurate to say that value investors (and there are a variety of methods – Net-Net, GARP etc) usually look at the intrinsic value of the stock when making buy and sell decisions and do not place that much emphasis on market timing.
I was looking forward to a snarky reply after reading the article, but I see five people beat me to it, so I’ll hold off.
According to John Hussman, “A typical bear market erases over half of the preceding bull market advance.” (http://hussman.net/wmc/wmc120806.htm). If that remark is true, then buy-and-hold investors who are currently buying the SP500 at this level (~1400) would have to hope it goes much, much higher. If my calculations are correct, and unless this time is different, the SP500 would have to reach a high of about 2120 during this market cycle for buy-and-hold investors’ current purchases to break even (price-wise) at the market cycle low.
Buy and hold what? What did you say?