New Investing Idea: The Rational Investing Model is the alternative to the Buy-and-Hold Investing Modeland pleasantly received a reply from the author of the above article:
Rob Bennett said...
This is Rob Bennett, author of the Google Knol on "Why Buy-and-Hold Investing Can Never Work." Thanks for sharing some of the ideas set forth in the Knol with your readers, BullBear. If you or others have questions, I'm happy to help out to the extent that I am able. Rob
Thanks Rob for allowing me to share your article in my blog.
Buy and hold strategy is safe for selected stocks. Those using this strategy should be stock pickers; having only good quality companies in their portfolios and only buying them when their prices are obviously at bargain or fair prices. Over the short term, the returns will be volatile, but over the long-term the returns on these investments will be predictably positive reflecting their fundamentals.
Though incorporating a long-term market timing based on valuation of the market may increase returns, like any market timing strategy, it may also impacts negatively on the returns too.
However, there are the very few periods when market timing can be usefully employed with a high degree of confidence and conviction. Those with a good understanding of the valuation of the stock market can employ this infrequently to their benefit when the valuations of the markets are obvious at the extremes. Warren Buffett had done this on a few occasions in his very long investing lifetime. In other periods (the majority of the time), buy and hold for the long term is safe and it works (my personal testimony), but for selected stocks only bought at bargain or fair prices.
Investors would be impressed that Warren Buffett did make adjustments to his allocations to equities at certain periods during his long investing career. These adjustments were based on valuations of the stocks and the market. There were periods his exposure to equities were low when he felt the market was overpriced. At one stage, he returned cash to all his investors as he could find no value in equities to justify continuing investing their money in stocks. And there were the few occasions when Warren Buffett saw deep values in stocks and invested heavily, usually at the bottom of bear markets. Yet, these were the times when other investors were most fearful.
What Warren Buffett did was essentially quite close to what Rob Bennett has written:
The Rational Investing Model encourages investors to take price (valuations) into consideration when setting their stock allocations.
Though we often hear only his "buy and hold forever" mantra, Warren Buffet has in fact been cleverly employing the equivalent of THE RATIONAL INVESTING MODEL, incorporating long-term market timing based on valuation of the market in his allocation of his money to stocks.
The links below documented these actions by Warren Buffett:
A Better Approach to Investing from Rob Bennett of A Rich Life
I'd like to introduce you to a very solid approach to investing from Rob Bennett, author of A Rich Life. His investment approach has been given many names (the one I use for it is dynamic asset allocation). The principles are sound and over the long run, it will serve to reduce overall risk in your portfolio while providing more than adequate returns when compared to static or strategic asset allocation methods. To learn more, read on...