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The Death of the ‘Buy & Hold’ Investor!

By December 17, 2008November 22nd, 2023Market Commentary, Uncategorized

As this will be my last posting for 2008, I would like to express my thanks to all of you who have read and contributed to my blog. This was a new venture for me, and I am pleased to say it has been great fun and very successful. We have had in excess of 10,000 ‘hits’ to the site after just 9 weeks of ‘blogging’. I hope that the topics I have been posting have been able to assist you in some small way in your education and your trading and investing endeavours. The idea being that this blog can be a continual reference point, allowing you to refer back to the various topics in the months and years ahead. We certainly have some exciting projects in the pipeline for 2009. This blog site is definitely one of those and I will be back in mid-January for my regular weekly comment on various aspects of the market and trading and investing in general.

Like all years, 2009 will be different from all others. It will present challenges and exciting prospects and opportunities to all of us in various ways. It will reward the prepared and educated traders and investors, and frustrate those who are unprepared. Those that have a solid plan in place for engaging or perhaps re-engaging the market when the time is right, will be ready and able to take advantage of the opportunities as and when they present themselves. Those that don’t have a plan in place, or those that are sitting on portfolio’s that have lost a significant portion of their value, and are waiting patiently for the market to resume it’s uptrend, probably won’t participate in the opportunities through fear, a belief that money can’t be made in the market, or both.

The ‘buy and hold’ strategy employed by many equity investors over recent years during the bull market has proved disastrous as the market has collapsed. They have been left holding stocks that have collapsed in price, as the underlying businesses have imploded. With no clearly defined exit strategy or portfolio exposure minimisation strategy, they have simply sat and watched as their capital has eroded in line with downward pressure on share prices. Many of these investors are down in excess of 50%. I know of one so called ‘buy and hold’ investor with a significant parcel of RIO shares in his portfolio. The price of RIO has collapsed from a high of just short of $160.00 per share in May of this year, to around $40.00 today – and, he still has them in his portfolio!

He has not only suffered a huge reduction in the value of his portfolio, but has foregone a huge profit on the ‘trade’ through not having a clearly defined exit strategy in place. A compounding investment error is having too much of his portfolio in a single stock; we call this a money management error. In addition, the opportunity cost of not having banked the profit or limited the loss is enormous. Just think of what he could do with all the lost profit from that trade when the market once again presents us with buy signals! Instead, he is locked into a dud position with his fingers crossed while he waits for the market to return to the levels we saw in late 2007/early 2008.

Needless to say, he was NOT a SPA3 user. If he had been, he would have had clear and unambiguous sell signals provided by the SPA3 system, and would have been able to exit the trade, bank the profit or limit losses, and participate in new buy signals as and when they present themselves, starting again from a far higher capital base.

This is just a single stock without leverage through, say, a margin lending facility! Bring leverage into the equation across a number of stocks and the picture is far worse.

The majority of people in these and similar positions have little or no plan for engaging the market. Their buying decisions are loosely based on fundamental analysis, news stories, broker ‘advice’, newsletters, or hot tips from a mate, and do OK during a rampaging bull market, such as the one we experienced up until the end of 2007. But when the bull market ends and the bears gain control, these “punters” have no defined point at which to exit or lighten their positions.

Many also engage in another silly activity – that of averaging down! Instead of cutting their losses they fall for the age old trap of buying more because the price is now cheap. If the stock was a good deal at $10.00 per share, it must be an even better deal at $5.00, and then again at $2.00. They then watch as the market smashes their beloved share even further and they are left holding a worthless stock as a long term investment. The outcome of averaging down is increasing your exposure in a stock that is trending down! You should only do the exact opposite! Averaging down is predicated on the myth that all stocks will eventually go up again. Firstly, this is a total unknown amd mostly untrue and secondly, if they ever do, when?

Put simply, buy and hold strategies, don’t work over the long term. All it needs is a market reset such as has occurred with too much exposure to the wrong stocks or too much leverage – at the wrong time of your investing career – and your portfolio may never recover. Many have said it is “time in the market”. I have always disagreed. It is “time in the market” and “timing the market”.

The monthly log chart of the S&P500 shows a 20 year bull market followed by a 17 year sideways market then followed by a 17 year bull market. The S&P500 has been moving sideways now for nearly 9 years. Both sideways markets have had 50% or near 50% bear markets and 60%+ bull markets during the long term secular sideways movement. It may be many years before equity market indices make new highs that lend themselves to the buy and hold strategy again, as buy and hold strategies ONLY work in secular bull markets such as those from the mid 1940’s to the mid 1960’s and the late 1982 to early 2000 bull market. Active investment strategies will work in both long term secular bull markets and long term secular bear markets that mostly go sideways over many years. Why take the chance with a buy and hold strategy? Can your portfolio afford to move sideways with the market for many years to come if the sideways market continues for another 8 – 10 years?

Actively managed portfolio’s with a clear strategy for undertaking ALL buy and sell decisions that has an edge will always outperform the overall market and the buy and hold investor provided that the actively managed portfolio is sufficiently capitalised. SPA3 has proven this. The SPA3 strategy with hedging has managed to achieve 22.6% compounded per annum (or 402% total profit after brokerage pre tax) since January 2001 to current whilst the ALL-ORDS has managed just 1% compounded per annum (or 7.6% total profit), that is, sideways movement for nearly 8 years.

Mechanical traders and investors know that their system has a clearly defined and measurably EDGE in the market, combined with a strict set of trading rules and processes for engaging the market with confidence and consistency. They also employ strict money management and risk management that they adhere to at all times. In essence they know what to do, when to do it, and how much of it to do. They have minimal emotional involvement with their trades (unlike our friend above with the RIO shares) – they have developed a portfolio mindset (as we discussed in an earlier blog ), make minimal trading errors and they have developed the ability to execute all trades with a Traders Mindset (as discussed in last week’s blog).

I mentioned brokerage above. Active investment strategies in equities were impossible to to deploy up until the mid 1990’s because the minimum borkerage rates were too high to actively trade. Stock prices, on average, did and do not move enough over a 2 – 4 month period to cover 2.5% each way brokerage rates. With minimum brokerage rates below $20 or 0.11% the era of actively managing portfolios was born. Couple this with the availability of investing tools and the 52% retracement of equity markets in 2008 the buy and hold investment strategy may go the way of the dinosaurs.

What will the market do in 2009? Who knows! The most important question is – “Will you be ready to participate when it does turn and the next uptrend begins?” Will you be prepared and confident and not only know what to do but to do what you know? Or will you still knee-jerk react by randomly selecting stocks based on news stories, fundamental analysis, brokers advice, newsletters, or some unresearched set of technical indicators? The key to success is to learn from the mistakes of the past, educate yourself, be prepared, and know exactly what to do next time. Employ a proven, mechanical trading strategy, like SPA3, and begin trading and investing in a professional manner using a proven strategy and processes with a clearly defined and measurable edge in the market. Doing the same thing that you have always done will result in the same outcomes.

My wish for 2009 is for all the buy and hold and leveraged investors out there to learn from their mistakes, shift their investing paradigm, re-educate themselves and employ a proven trading system with well defined risk management processes for all their trading and investing. This way the market can throw whatever it likes at you and you will be prepared.

I wish everyone a Merry Christmas and a safe, happy and prosperous 2009.


  • alfred t piper says:

    demo soon

  • brian Costello says:

    Rubbish, try telling the above to Warren Buffet

  • P. Allan says:

    You are right – buy and hold is a very dangerous strategy when faced with a secular bear market. The last 3 such markets (1966-82, 1929-49 and 1901-19210) had lots of rallies, but they all proved dead cat bounces since the underlying trend was sideways. In such a market either a strong value approach (which compensates for no capital gain through offering high yield) or a mechanical trading approach which rides the cycles up and shorts them when they go down is the only secure way to invest. Yet most investors still think that the secular bull market that started in 1982 will soon resume and so buy and hold will see them through. Warren Buffet has lost a fortune in this bear market, but his strong value approach may still see him survive a sideways market. But trading the cycles if can be done successfully using a mechanical trading system may hold the key. I look forward to you developing an EFT product so I can trade the whole market.

  • Marcadrian says:

    I love how people hold onto WB as the be all and end all of investing as if the deals he puts together are available to everyone. The average chump is RIO/TLS/CBA buy and hold who has just seen his/her portfolio halved.

  • Lee Strauss says:

    Got to agree with Marcadrian, Warren plans his investment strategy with a plan for 12, 24 48 months out. I don’t believe you can pick a strategy once and then stick to it for the rest of your investment life. You’ve got to be active and change your investment strategy to that one which will serve you best in the current market.

    Buy and Hold was a strategy that worked for many, for some years myself included. It now time to review that strategy and find a new approach that suits you personally.

    For those that lost half their portfolio it time to learn about stops. This can help you minimize your losses, personally I set stops at (20% off the top), sure I get dump out of trades, but I still got my capital to trade another day.

    There much we can learn from Warren B, following in his footsteps blindly is not one of them, think for yourself, take responsibility for your own strategy.

    Mechanical trading is a strategy that I am considering one for my future trading.

    Season Greeting to everyone, hope 2009 is more successful for all of you.

  • Larry K says:

    Don’t tell me that Buffett did not lighten his holdings substantially as the market tanked. I bet he is still worth a lot less today than a year ago, and I doubt he enjoys that any more than we have.

  • Andrew R. says:

    Perhaps it might be worth mentioning here that there is a certain chart which various analysts like to put forward from time to time that shows the long-term relationship between share prices and the profits of those companies which those shares represent. The important lesson from this chart – and the same rule applies to all share markets across the globe – is that earnings-per-share for all these markets will always revert to the mean for that particular market in the long term. Since company earnings are linked to real GNP growth then it is quiet reasonable to expect that after several years of sharemarket growth in a given economy and where that growth has outstripped real GDP growth by a significant margin then a time of adjustment will at some stage occur which will force the markets back to a point of equilibrium. In Australia in recent years we have had typically 20% annual growth rates in the All Ords. yet GDP growth has averaged about 4% PA.

    The underlying point is that wealth cannot be artificially derived, therefore, without a superior strategy, one cannot expect to do better from the markets than whatever is reflected in the overall real growth of that economy.

    I don’t know if anyone has done a study on the affects that the IT revolution has had on sharemarket volatility, but I wouldn’t mind betting that it has made markets more rather than less volatile.

  • dennis courtney says:

    Re Death of Buy & Hold Investor.
    Actively managed portfolio’s with a clear strategy for undertaking ALL buy and sell decisions that has an edge will always outperform the overall market and the buy and hold investor provided that the actively managed portfolio is sufficiently capitalised. SPA3 has proven this.

    Please provide further information on ” SPA3 Portfolio…Sufficiently Capaitalised.

    Dennis Courtney

  • Gary Stone says:

    Reply to Comment by Brian Costello:

    “Rubbish, try telling the above to Warren Buffet”

    Please refer to the comment made by Otto on a previous posting on this Blog on Warren Buffett and how he goes about it: Click here. You can also see my response to Otto’s comment.

    There is no doubt that Warren Buffett does NOT just buy and hold all his positions. I also agree with Marcadrian’s comment: “I love how people hold onto WB as the be all and end all of investing as if the deals he puts together are available to everyone.”

    His investing requirements are so different to just about everybody else in the world’s population that his strategies cannot be assumed to apply to all of us. Investors’ capital, time availability, skill levels, investment horizon etc are all different.


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