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Tue. Apr. 28, 2009

Buy-And-Hold Under Attack *

Have you ever noticed those that most vehemently attack a buy-and-hold strategy really don’t understand how buy-and-hold works? They confuse a buy-and-hold strategy with day-trading with a longer duration.

Case in point, the Forbes article Buy-And-Hold In Disrepute by Robert Lenzner. He tries to tie the buy-and-hold strategy to a risky BRIC (Brazil, Russia, India and China) investment:

They lost even more in Russia and other emerging markets–to the tune of 70% or more–if they bought into the “BRIC” investing concept promoted hard by Goldman Sachs (GS) in the early part of the decade. You needed to buy and sell, not buy and hold. If you bought and held, you had the pleasure of the run-up followed by the pain of the collapse.

A true implementation of buy-and-hold would include a reasonable asset allocation framework in which emerging markets would never command anything more than a small percentage of total invested assets. Since, the individuals investing their hard-earned money should not be responsible in any way, who can we blame Mr. Lenzner?

The truth is that the public was badly served by its investment advisers, like Alliance Bernstein, or their big public mutual funds, which stayed 100% invested all through the lead-up to the worst financial crisis since the 1930s. They took little or no money off the table. They never called your Aunt Sadie to advise her to take profits in 2006 and 2007 before the bottom dropped out.

So, the brilliant investment advisers should immediately sell as the investment peaks, then buy back in as it hits bottom? I thought we were talking about buy-and-hold. This sounds a lot like market timing.

Investors beware: You have to watch over your money like hawks, read your monthly statements and ask questions. You must be active, not passive, when dealing with commoditized investment firms…

Finally, we agree on something. Maybe I should stop reading on a high note.

Were you told to sell your General Electric (GE) or your Citigroup (C) before they became single-digit stocks? Many value-oriented funds were buying Fannie Mae (FNM) months before it became Uncle Sam’s property.

No, but then again we should take personal responsibility for our market losses. Actually, the article would have been a lot better if it was titled “Professional Money Managers In Disrepute” and the unneeded references to buy-and-hold were omitted. But then again mentioning (or taking shots at) buy-and-hold and Buffett (I spared you from that remark) helps with the search engines and garners clicks.

Full Disclosure: No position in the aforementioned securities, but I did lose money in GE and C, in which I take full responsibility.


5 Responses to “Buy-And-Hold Under Attack *”

  1. Nice article. The people who don’t like buy and hold are mostly people who never stick to one strategy. They go from one strategy to another in search of gold, only to keep losing money in the process.
    In addition to that, what is the alternative to buy and hold investing that would work for the average working joe? Actively managed funds? Hedge funds? But these are already failing to even beat the S&P 500..

  2. You hit the nail on its head, when you said “asset allocation framework… emerging markets ….small percentage..” That statement is the key. Every asset class has its place, but its importance and significance is different. Investors need to employ them accordingly.

  3. Dave Shafer says:

    You are right about these folks and their critiques of buy-and-hold. But I do think that the buy-and-hold strategy married with mutual funds is a losing proposition. And the data proves that to be correct. I believe if you are in the market you should be an active investor who does their own basic company analysis and lives with the results of their decisions, uses basic sell strategies to stop market losses at their risk tolerance level and keeps adding to their dividend income portfolio. The last part I have come to recently and wish I had done it earlier in my investing career!

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