Here is a theoretical analysis of the behaviour of prices of stocks over a 5 or 10 year period.
Stock prices are easy to monitor. Over a long period, these stock prices in general reflects the value of the underlying business of the stocks.
These stocks can be grouped according to the behaviour of their prices in these broad groups.
1. Some stocks performed very well. Their prices climbed consistently and those who have these stocks enjoy good returns from capital appreciations.
2. Many stocks performed so-so. Their stock prices stayed within certain ranges, either broad or narrow. These stocks did not reward their owners well in returns from capital appreciations. Those who bought these stocks at low prices might have a small gain, but over many years, these translated to very poor compound annual returns. Those who bought these stocks at high prices might have irrecoverable losses. Owning these stocks carried with them opportunity costs, provided the dividends were substantial to overcome these.
3. Many stocks performed terribly. Their stock prices declined and continued to decline further over many years. These stocks caused massive losses to those who own them. The dividends they provided, if any, were poor compensation to these severe losses.
4. Many stocks performed very well for a few or many years and then declined when they no longer were able to protect their businesses against competitors or for various other reasons. Some rose again from the ashes, many faltered into obscurity or permanent demise.
5. Many stocks performed poorly for many years eroding the patience of their owners. Some might perform intermittently, though many remained in such states for many more years.
The best stocks to have are those in Group 1. To capture all the returns from such stocks over a long period, buy and hold is the right strategy. These stocks are few in number in any bourses and often trade at high valuations. The ability to pick and buy these stocks at fair or bargain prices will be very rewarding.
Buy and hold strategy is definitely not ideal for the stocks in the other groups. At best, it provides a meagre or average return in one's investment. However, holding non-performers or losers over a long period of time compounds the losses further due to opportunity costs.
Showing posts with label buy and hold. Show all posts
Showing posts with label buy and hold. Show all posts
Thursday 4 March 2010
Tuesday 2 March 2010
A Comparison of Buy and Hold With Stock Market Timing Strategies
A Comparison of Buy and Hold With Stock Market Timing Strategies
By Tom Kearney
Stock market timing strategies can be long or short term. The strategies are different for single stocks than they are for mutual funds, of course. With single stocks you base your strategy on your knowledge of an individual company. What are the fundamentals of the company; earnings, sales, assets, technology and management. The context of the over all market for the service or product that the company produces is also relevant to knowing when to buy and when to sell.
It is simple to see the point of stock market timing strategies. As Warren Buffet will tell you over and over again, all you need to do is buy low and sell high. The tough part, of course knowing when. It is not possible to always be right, but it is possible to be right enough often enough to stay in the game.
Many experts advise a buy and hold strategy. This philosophy is based on the historical fact that markets rise in value over time, despite recessionary blips. But even in a buy and hold scheme, one must be able to recognize when a stock is in a long term retreat. Technology changes as does the competitive landscape. One need only think of the web companies that collapsed when the tech bubble burst to see that buy and hold is a risky undertaking during a bubble.
Setting limits is a commonly used tactic when it comes to stock market timing strategies. Buying stocks when they are at their highest level is only a good timing strategy when the company is a penny stock that has made some sort of fundamental breakthrough.
Mining stocks are the clearest example of this. If a mining stock hits the mother-load, buying it early, even it has risen to its highest ever, is feasible as you have actual metal in the ground to secure your investment.
On the other hand, getting in at the peak of a bubble without a good reason for doing so beyond the fact that the stock is moving up is a recipe for disaster. For this reason, we can establish a firm Rule Number 1 for stock market timing strategies: do not buy on the bubble; only buy on the basis of a new ingredient in a company basics (earnings, sales, management, assets, etc).
As far as funds go, it is market fundamentals that one must pay attention to. Again, the technology sector gives us prime examples. When the technology bubble started to deflate in February of 2000, the deflation continued well into 2001. Getting out of tech-based mutual funds in the spring of 2000 saved many investors from ruin. Those who bought and held even after it became clear many of the tech companies would not survive paid dearly.
Stock market timing strategies versus buy and hold is a debate that will continue far as long as there are stock markets. The market moves on emotion, but it earns on fundamentals. Day traders make their living on stock market timing strategies. For the average investor, however, buy and hold, but staying informed and being willing to move when fundamentals warrant, are the order of the day.
Taking advantage of stocks is easy when you learn the details of market timing! Get all the information you need today to include market timing strategies in your trading strategy and see significant returns fast! Article Source: http://EzineArticles.com/?expert=Tom_Kearney |
Wednesday 10 February 2010
New Investing Idea: The Rational Investing Model is the alternative to the Buy-and-Hold Investing Model
The core Buy-and-Hold claim is that changing one's stock allocation in response to big price changes is not necessary for long-term investing success.
The Rational Investing Model encourages investors to take price (valuations) into consideration when setting their stock allocations.
History of Buy-and-Hold approach
Buy-and-hold approach is when investors maintain the same stock allocation at all times, irrespective of the market valuation.
Most middle-class workers have long had a fear of investing in stocks because of the big losses associated with this asset class at times of stock crashes. The promise of a scientific, long-term approach held great appeal. Few middle-class workers studied Buy-and-Hold to the extent needed to understand where the ideas came from or why they were supposed to work. But most quickly grasped the essential point being promoted -- this was responsible investing. Buy-and-Hold became popular because it was viewed as being a rejection of the Get Rich Quick thinking that had given much investment commentary a bad name.
Why Buy-and-Hold can never work.
It's easy today to explain why Buy-and-Hold can never work. The root idea is preposterous (but not obviously so to those who have not yet seen through it -- there are many smart and good people who possess a strong confidence in the concept). For Buy-and-Hold to work, valuations would have to have zero effect on long-term returns. Stocks would have to be the only asset class on the face of Planet Earth of which it could be said that the price paid for the asset has no effect on the value proposition provided. This cannot be. Price must matter. And if price matters, investors should not be going with the same stock allocation at times when valuations are insanely high as they do when stocks are fairly priced or low priced. Buy-and-Hold defies common sense.
The science of investing
The science of investing showed that short-term forecasting does not work and that a long-term focus is needed. The science appeared at the time to suggest that a Buy-and-Hold strategy (sticking to the same stock allocation at all times) makes sense.
The science did not prove that Buy-and-Hold works. The Greatest Mistake in the History of Personal Finance took place when the academics jumped to the hasty conclusion that the fact that short-term timing does not work necessarily leads to a conclusion that Buy-and-Hold is the only rational strategy.
But Shiller's 1981 research (confirmed by a mountain of research done since then) shows that overvaluation is a meaningful concept. Shiller showed that stocks offer better long-term returns starting from times of fair or low prices than they do starting from times of insanely high prices. Even many Buy-and-Hold advocates acknowledge today that valuations matter. William Bernstein says that valuations affect long-term returns as a matter of "mathematical certainty."
The market must ultimately be efficient, as the academics responsible for the Buy-and-Hold concept claimed. Yet the academic research of the past three decades shows conclusively that the market is not immediately efficient. What, then, is the full reality?
The full reality appears to be that the market is gradually efficient, not immediately efficient. It is investor emotions that determine market prices in the short term. But it is economic realities that determine stock prices in the long term (after the completion of 10 years of market gyrations or so). If the stock price rises too much higher than the price justified by the economic realities, opportunities open up for competing businesses to obtain the same assets on the cheap (relative to the market price assigned to them) and thereby to create a new business with the same profit potential as the overvalued one and thereby to pull the value assigned to it by the stock market down to reasonable levels. The market does indeed insure that stocks are priced properly. But it does not do this in an instant. The process can drag out for 10 years or even a bit longer.
What really works: successful long-term investing requires long-term market timing
The strategic implications are earth-shaking. It turns out that we have been telling millions of middle-class investors precisely the opposite of what really works in stock investing. Since the market sets the price improperly in the short term and properly in the long term, successful long-term investing requires market timing (not the discredited approach of short-term timing, but long-term timing, which the historical data shows has always worked). The key to long-term success is to disdain the idea of sticking with the same stock allocation but instead always to be certain to adjust one's stock allocation as required by changes in the valuations assigned to the broad market indexes (only one allocation change every 10 years is required on average but it is essential that long-term investors make this change -- Buy-and-Hold never works in the long run because it argues that this change is not necessary or even that it is a good idea not to make the allocation change).
Discarding the Buy-and-Hold Era and adopting the Rational Investing Era
There is one step required before the transition from the Buy-and-Hold Era to the Rational Investing Era (The Rational Investing Model is the alternative to the Buy-and-Hold Investing Model -- it is described in some depth in articles and podcasts available at the http://www.passionsaving.com/ site) can begin in earnest. We need to persuade the many experts who advocated Buy-and-Hold to acknowledge the mistake and to thereby launch a national debate on what really works in stock investing. As of today, an institutional interest in preserving the status quo and avoiding the need to acknowledge mistakes has worsened the economic crisis and threatened to bring on a Second Great Depression.
We need a national debate on what works in stock investing. Buy-and-Hold advocates should of course be part of that debate. Buy-and-Hold advocates are smart and good people and have developed many rich insights despite the mistake they made about the core Buy-and-Hold claim (that changing one's stock allocation in response to big price changes is not necessary for long-term investing success). But we need a debate in which Buy-and-Hold advocates drop the pose of perfect understanding that has kept us from exploring new insights for so many years now. We need to see an openness to new investing ideas if our economic and political systems are to survive today's crisis. We need to rebuild optimism for the future by partaking in a fresh start in our effort to discover how stock investing works, We need to put aside those of the old rules that no longer work and replace them with better-informed new rules that do.
The Implication of moving from the Buy-and-Hold Investing Model to the Rational Investing Model
Many have lost sight of the point of investing analysis -- to help middle-class people finance their retirements. All this needs to change if our way of life is to survive the inevitable collapse of the Buy-and-Hold Model.
Our hope lies in coming to see the move from the Buy-and-Hold Investing Model to the Rational Investing Model (the Rational Model says that investors must consider price when setting their stock allocations) not as an investing question or an economics question but as a political question. We have a long tradition in this country of free speech. Free speech is permitted in our discussions of baseball and novels and nutrition and fashions. It should be permitted in discussions of the flaws of the Buy-and-Hold Model as well.
Summary
Buy-and-Hold can never work. But many of the insights developed by the smart and good people who brought us the Buy-and-Hold Model can do wonderful things to help millions when incorporated into a model that does work -- the Rational Investing Model, a model that encourages investors to take valuations into consideration when setting their stock allocations.
http://knol.google.com/k/why-buy-and-hold-investing-can-never-work#
http://arichlife.passionsaving.com/
The Rational Investing Model encourages investors to take price (valuations) into consideration when setting their stock allocations.
History of Buy-and-Hold approach
Buy-and-hold approach is when investors maintain the same stock allocation at all times, irrespective of the market valuation.
Most middle-class workers have long had a fear of investing in stocks because of the big losses associated with this asset class at times of stock crashes. The promise of a scientific, long-term approach held great appeal. Few middle-class workers studied Buy-and-Hold to the extent needed to understand where the ideas came from or why they were supposed to work. But most quickly grasped the essential point being promoted -- this was responsible investing. Buy-and-Hold became popular because it was viewed as being a rejection of the Get Rich Quick thinking that had given much investment commentary a bad name.
Why Buy-and-Hold can never work.
It's easy today to explain why Buy-and-Hold can never work. The root idea is preposterous (but not obviously so to those who have not yet seen through it -- there are many smart and good people who possess a strong confidence in the concept). For Buy-and-Hold to work, valuations would have to have zero effect on long-term returns. Stocks would have to be the only asset class on the face of Planet Earth of which it could be said that the price paid for the asset has no effect on the value proposition provided. This cannot be. Price must matter. And if price matters, investors should not be going with the same stock allocation at times when valuations are insanely high as they do when stocks are fairly priced or low priced. Buy-and-Hold defies common sense.
The science of investing
The science of investing showed that short-term forecasting does not work and that a long-term focus is needed. The science appeared at the time to suggest that a Buy-and-Hold strategy (sticking to the same stock allocation at all times) makes sense.
The science did not prove that Buy-and-Hold works. The Greatest Mistake in the History of Personal Finance took place when the academics jumped to the hasty conclusion that the fact that short-term timing does not work necessarily leads to a conclusion that Buy-and-Hold is the only rational strategy.
But Shiller's 1981 research (confirmed by a mountain of research done since then) shows that overvaluation is a meaningful concept. Shiller showed that stocks offer better long-term returns starting from times of fair or low prices than they do starting from times of insanely high prices. Even many Buy-and-Hold advocates acknowledge today that valuations matter. William Bernstein says that valuations affect long-term returns as a matter of "mathematical certainty."
The market must ultimately be efficient, as the academics responsible for the Buy-and-Hold concept claimed. Yet the academic research of the past three decades shows conclusively that the market is not immediately efficient. What, then, is the full reality?
The full reality appears to be that the market is gradually efficient, not immediately efficient. It is investor emotions that determine market prices in the short term. But it is economic realities that determine stock prices in the long term (after the completion of 10 years of market gyrations or so). If the stock price rises too much higher than the price justified by the economic realities, opportunities open up for competing businesses to obtain the same assets on the cheap (relative to the market price assigned to them) and thereby to create a new business with the same profit potential as the overvalued one and thereby to pull the value assigned to it by the stock market down to reasonable levels. The market does indeed insure that stocks are priced properly. But it does not do this in an instant. The process can drag out for 10 years or even a bit longer.
What really works: successful long-term investing requires long-term market timing
The strategic implications are earth-shaking. It turns out that we have been telling millions of middle-class investors precisely the opposite of what really works in stock investing. Since the market sets the price improperly in the short term and properly in the long term, successful long-term investing requires market timing (not the discredited approach of short-term timing, but long-term timing, which the historical data shows has always worked). The key to long-term success is to disdain the idea of sticking with the same stock allocation but instead always to be certain to adjust one's stock allocation as required by changes in the valuations assigned to the broad market indexes (only one allocation change every 10 years is required on average but it is essential that long-term investors make this change -- Buy-and-Hold never works in the long run because it argues that this change is not necessary or even that it is a good idea not to make the allocation change).
Discarding the Buy-and-Hold Era and adopting the Rational Investing Era
There is one step required before the transition from the Buy-and-Hold Era to the Rational Investing Era (The Rational Investing Model is the alternative to the Buy-and-Hold Investing Model -- it is described in some depth in articles and podcasts available at the http://www.passionsaving.com/ site) can begin in earnest. We need to persuade the many experts who advocated Buy-and-Hold to acknowledge the mistake and to thereby launch a national debate on what really works in stock investing. As of today, an institutional interest in preserving the status quo and avoiding the need to acknowledge mistakes has worsened the economic crisis and threatened to bring on a Second Great Depression.
We need a national debate on what works in stock investing. Buy-and-Hold advocates should of course be part of that debate. Buy-and-Hold advocates are smart and good people and have developed many rich insights despite the mistake they made about the core Buy-and-Hold claim (that changing one's stock allocation in response to big price changes is not necessary for long-term investing success). But we need a debate in which Buy-and-Hold advocates drop the pose of perfect understanding that has kept us from exploring new insights for so many years now. We need to see an openness to new investing ideas if our economic and political systems are to survive today's crisis. We need to rebuild optimism for the future by partaking in a fresh start in our effort to discover how stock investing works, We need to put aside those of the old rules that no longer work and replace them with better-informed new rules that do.
The Implication of moving from the Buy-and-Hold Investing Model to the Rational Investing Model
Many have lost sight of the point of investing analysis -- to help middle-class people finance their retirements. All this needs to change if our way of life is to survive the inevitable collapse of the Buy-and-Hold Model.
Our hope lies in coming to see the move from the Buy-and-Hold Investing Model to the Rational Investing Model (the Rational Model says that investors must consider price when setting their stock allocations) not as an investing question or an economics question but as a political question. We have a long tradition in this country of free speech. Free speech is permitted in our discussions of baseball and novels and nutrition and fashions. It should be permitted in discussions of the flaws of the Buy-and-Hold Model as well.
Summary
Buy-and-Hold can never work. But many of the insights developed by the smart and good people who brought us the Buy-and-Hold Model can do wonderful things to help millions when incorporated into a model that does work -- the Rational Investing Model, a model that encourages investors to take valuations into consideration when setting their stock allocations.
http://knol.google.com/k/why-buy-and-hold-investing-can-never-work#
http://arichlife.passionsaving.com/
Thursday 4 February 2010
What Main Street investors did during and after the recent bear market
Main Street investors change their strategies
Glenn Salka of Fair Lawn, N.J., who near the 2009 market bottom said he was putting 100% of his free cash into "safe stuff," is still doing that. Why? "Fear. Risk. Take your pick," he says.
Lok Patel, Dubuque, Iowa: "Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends."
Wendy Hunt, Cincinnati: "We are taking risks again. We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
By Adam Shell, USA TODAY
NEW YORK — Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.
He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.
That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.
But Blank has no regrets: "I have no desire to attempt to make back what I lost."
Since stocks stopped plunging in March, professional money managers and traders on Wall Street have piled back into the stock market, benefiting from the sharpest rebound in history. But, like Blank, many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks — leading Andre Weisbrod, CEO of Staar Financial Advisors, to note in a recent report that many buy-and-hold investors have unwittingly switched to a "buy-and-fold" strategy.
Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as certificates of deposit and money market funds.
Harry Nieman, 73, a retiree from Pittsburgh, who lost 25% of his $2 million portfolio in the 2008-09 downdraft, just nibbles on individual stocks now, while stashing most of his cash in CDs and high-yielding online bank accounts. David Moran, 62, kept nearly 100% of his money in stocks during and after the 2000 tech-stock bust but sold a lot of shares before the March 2009 low. "I could never be 100% invested in stocks again," the Wayland, Mass., technical writer says.
Similarly, Glenn Salka, a 57-year-old insurance professional from Fair Lawn, N.J., who near the 2009 market bottom told USA TODAY he was putting 100% of his free cash into "safe stuff," is still employing the same conservative strategy. Asked why, Salka said, "Fear. Risk. Take your pick."
Market turbulence caused by signs that China is clamping down on credit to slow its economy, bank bashing by the White House, concerns over debt problems in some European countries and the recent pullback has investors on edge. A two-day rally this week left stocks down 1.1% in 2010.
Following the money trail highlights the shift toward defense. Since the start of 2008, when the worst financial crisis since the Great Depression began shredding paper wealth into confetti, stock funds have suffered outflows totaling $232 billion, Investment Company Institute statistics show. In contrast, fixed-income bond mutual funds have enjoyed inflows of $431 billion.
The love affair with bonds could end badly, says Brian Belski, chief investment strategist at Oppenheimer. In the 2000s, bonds outperformed stocks by a record 7.7 percentage points, on average, annually. The only other times bonds outpaced stocks for a full decade were the 1930s and 1970s. In both cases, stocks rebounded in the following decades, topping bonds by an average 10 percentage points a year.
"Due to the shock and awe of the past 10 years, most people went to the safest assets they could find," says Belski, who thinks now is a good time to move out of bonds into stocks.
Some analysts insist the growing reliance on lower-risk strategies is more than a temporary reaction to the financial tumult that has shaken investor confidence. They believe it's a lasting, long-term change. They warn that individual investors won't return to their old pattern of funneling the bulk of free cash flow into stocks.
The last time investors were hit by major back-to-back stock bear markets was 1968-70 and 1973-74. Back then, they lowered their stock holdings as a percentage of assets from a peak of 35% to 15%. They did not come back to the market in a big way until the 1982 bull market, Bank of America Merrill Lynch research shows.
David Rosenberg, chief investment strategist at Gluskin Sheff, cites an aging population and two severe bear markets in the past decade as reasons individual investors are shifting their money into more stable investments.
"It makes perfect sense," he says. "The median Baby Boomer is 52 and is naturally shifting toward capital preservation."
Adds Bob Cohen, a financial planner at Financial Strategies & Wealth Management, "Investors still want to make money, but they're more aware of risks."
After the bear
Interviews with close to two dozen individual investors offer a more balanced portrait of how they have adapted their investment strategies after the worst meltdown since the 1930s.
Three types of investors have emerged from the bear market rubble.
•Buy-and-folders. There are many investors, including those nearing retirement, who just want out of the stock market to reduce anxiety, protect assets they still have and embark on a more risk-averse path. While this group won't necessarily stay out of the market forever, they are unlikely to make huge bets on stocks.
Martin Blank fits the profile. Asked why he won't ever again bet big on stocks, he said, "I have a basic distrust of the system."
Nieman, the 73-year-old Pittsburgh native and ex-banker, admits that he's much more "timid" when it comes to stocks. A big reason relates to his age. "I'm more cautious, more vulnerable," he says. "I am more concerned about preserving my capital. Everyone once believed that investing in stocks can make you a millionaire. But the past few years, we have seen that you can lose everything."
Aging demographics are playing a key role in the shift to more income-oriented portfolios, Citigroup research shows. Citing data from the Census Bureau, Citi notes that only 14% of people 65 or older are willing to take "substantial" or "above-average" risk in an effort to reap bigger investment gains, compared with 33% of people 40 to 64.
•Buy-and-holders. While staying fully invested is painful as losses mount when stocks plunge, it pays off when the inevitable rebound unfolds.
Lok Patel, 67, an engineer at John Deere, didn't sell any stock during the market's 57% plunge. He's glad he didn't. "The market came back," he says. Even though Patel, from Dubuque, Iowa, says he was shaken by the scary market volatility, he stuck to basic investment principles, such as spreading his money around many different types of assets, investing only in good companies and funneling a set amount of money each month into stocks, a strategy called dollar-cost averaging.
"Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends," Patel says, adding that stocks remain one of the few places investors can get a decent return these days.
Donna Bischoff, 59, a self-described "slow and steady" investor from New Orleans, has regained all but 0.2% of losses she suffered in the downturn — thanks to building a diversified portfolio, avoiding speculative stocks and sticking with her buy-and-hold strategy in bad times.
"I got burned in the '90s owning single stocks, and that taught me a lesson about diversification," Bischoff says, adding that she is gradually reducing her stock exposure to better reflect her lower risk tolerance as she nears 60.
•Double-downers. There is an old saying on Wall Street that the best time to buy stocks is when there's blood in the streets.
That's what Paul Davis, 48, did last spring when the Dow looked like it would tumble to zero.
In April 2009, three months after losing his job — and just a month after the market low when fear and panic remained high — Davis invested 90% of a $100,000 401(k) rollover in stocks. It paid off. The $100,000 is now worth $126,000.
Why did Davis take the risk? He had success in the past buying when fear was palpable.
"Some of the best investments I ever made were made after the 9/11 terror attacks," he said.
Michael Hartnett, chief global equity strategist at BofA Merrill Lynch, backed the strategy in a recent report. "Long-term investors should always buy 'humiliation' and sell 'hubris,' " he wrote. Stocks are now the "humiliated" asset class.
Margaret Schaefer, 70, a retired educator from Dearborn, Mich., did just that. Near the March 2009 low, she bought a basket of the most hated stocks: financials. She also bought General Motors when the automaker's future was in question. She tripled her money on both.
"CDs and money markets were paying under 2%," says Schaefer. "I was willing to take the risk."
And while the nearly 7% tumble off the recent high was a reminder that stocks can still go down in a hurry, an analysis of how stocks perform after a recession suggests that another 20% bear market decline is unlikely. Going back to 1928, the S&P 500 fell 10% or more six to 18 months after a recession in 10 of 13 cases (77% odds). But the index suffered only a 20%-plus drop five times (38%), says Ned Davis Research.
Says Ruff, "I missed the opportunity to buy at the bottom last year, and I don't need to be overly aggressive right now. But I'll start increasing my stock holdings at around a 10% correction." Ruff had 70% of his money in stocks pre-slump, vs. 56% now.
If another brutal bear market can be ruled out, that's good news for Wendy Hunt, a 37-year-old married mom from Cincinnati. Hunt who turned ultra-defensive in March, says she is back in the stock market.
"We are taking risks again," she says. "We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
Carmine Grigoli, chief investment strategist at Mizuho Securities USA, says that is a bullish sign. He expects more individual investors to come back to stocks and resume their normal investment patterns once it becomes clear the improvement in the economy and financial markets is here to stay.
"The more distant the memory of the financial crisis, the less frightening it becomes," he says.
http://www.usatoday.com/money/markets/2010-02-03-realinvestors03_CV_N.htm
Glenn Salka of Fair Lawn, N.J., who near the 2009 market bottom said he was putting 100% of his free cash into "safe stuff," is still doing that. Why? "Fear. Risk. Take your pick," he says.
Lok Patel, Dubuque, Iowa: "Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends."
Wendy Hunt, Cincinnati: "We are taking risks again. We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
By Adam Shell, USA TODAY
NEW YORK — Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.
He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.
That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.
But Blank has no regrets: "I have no desire to attempt to make back what I lost."
Since stocks stopped plunging in March, professional money managers and traders on Wall Street have piled back into the stock market, benefiting from the sharpest rebound in history. But, like Blank, many Main Street investors have yet to regain their stomach for the risky, uncertain and highly volatile world of stocks — leading Andre Weisbrod, CEO of Staar Financial Advisors, to note in a recent report that many buy-and-hold investors have unwittingly switched to a "buy-and-fold" strategy.
Individual investors who once embraced risk-taking have adopted a more defensive investing posture, preferring capital preservation over appreciation. Many are trimming the percentage of stocks they own and boosting holdings of safer investments, such as certificates of deposit and money market funds.
Harry Nieman, 73, a retiree from Pittsburgh, who lost 25% of his $2 million portfolio in the 2008-09 downdraft, just nibbles on individual stocks now, while stashing most of his cash in CDs and high-yielding online bank accounts. David Moran, 62, kept nearly 100% of his money in stocks during and after the 2000 tech-stock bust but sold a lot of shares before the March 2009 low. "I could never be 100% invested in stocks again," the Wayland, Mass., technical writer says.
Similarly, Glenn Salka, a 57-year-old insurance professional from Fair Lawn, N.J., who near the 2009 market bottom told USA TODAY he was putting 100% of his free cash into "safe stuff," is still employing the same conservative strategy. Asked why, Salka said, "Fear. Risk. Take your pick."
Market turbulence caused by signs that China is clamping down on credit to slow its economy, bank bashing by the White House, concerns over debt problems in some European countries and the recent pullback has investors on edge. A two-day rally this week left stocks down 1.1% in 2010.
Following the money trail highlights the shift toward defense. Since the start of 2008, when the worst financial crisis since the Great Depression began shredding paper wealth into confetti, stock funds have suffered outflows totaling $232 billion, Investment Company Institute statistics show. In contrast, fixed-income bond mutual funds have enjoyed inflows of $431 billion.
The love affair with bonds could end badly, says Brian Belski, chief investment strategist at Oppenheimer. In the 2000s, bonds outperformed stocks by a record 7.7 percentage points, on average, annually. The only other times bonds outpaced stocks for a full decade were the 1930s and 1970s. In both cases, stocks rebounded in the following decades, topping bonds by an average 10 percentage points a year.
"Due to the shock and awe of the past 10 years, most people went to the safest assets they could find," says Belski, who thinks now is a good time to move out of bonds into stocks.
Some analysts insist the growing reliance on lower-risk strategies is more than a temporary reaction to the financial tumult that has shaken investor confidence. They believe it's a lasting, long-term change. They warn that individual investors won't return to their old pattern of funneling the bulk of free cash flow into stocks.
The last time investors were hit by major back-to-back stock bear markets was 1968-70 and 1973-74. Back then, they lowered their stock holdings as a percentage of assets from a peak of 35% to 15%. They did not come back to the market in a big way until the 1982 bull market, Bank of America Merrill Lynch research shows.
Less demand for stocks, analysts say, could steal some of the cash ammunition the stock market needs to move higher.
David Rosenberg, chief investment strategist at Gluskin Sheff, cites an aging population and two severe bear markets in the past decade as reasons individual investors are shifting their money into more stable investments.
"It makes perfect sense," he says. "The median Baby Boomer is 52 and is naturally shifting toward capital preservation."
Adds Bob Cohen, a financial planner at Financial Strategies & Wealth Management, "Investors still want to make money, but they're more aware of risks."
After the bear
Interviews with close to two dozen individual investors offer a more balanced portrait of how they have adapted their investment strategies after the worst meltdown since the 1930s.
- The first is the buy-and-folder, or investors who sold near the bottom and have either stayed out of the stock market or gotten back in gingerly.
- The second is the old-fashioned buy-and-hold investor, those who stayed the course. They rode the market all the way down and still made automatic monthly investments to their 401(k)s, enabling them to participate in the rebound.
- The third is the so-called double-down investor. These more aggressive types had the courage to buy stocks near the market low. They were rewarded handsomely as stocks shot up off of depressed levels.
Snapshots of each type:
•Buy-and-folders. There are many investors, including those nearing retirement, who just want out of the stock market to reduce anxiety, protect assets they still have and embark on a more risk-averse path. While this group won't necessarily stay out of the market forever, they are unlikely to make huge bets on stocks.
Martin Blank fits the profile. Asked why he won't ever again bet big on stocks, he said, "I have a basic distrust of the system."
Nieman, the 73-year-old Pittsburgh native and ex-banker, admits that he's much more "timid" when it comes to stocks. A big reason relates to his age. "I'm more cautious, more vulnerable," he says. "I am more concerned about preserving my capital. Everyone once believed that investing in stocks can make you a millionaire. But the past few years, we have seen that you can lose everything."
•Buy-and-holders. While staying fully invested is painful as losses mount when stocks plunge, it pays off when the inevitable rebound unfolds.
Lok Patel, 67, an engineer at John Deere, didn't sell any stock during the market's 57% plunge. He's glad he didn't. "The market came back," he says. Even though Patel, from Dubuque, Iowa, says he was shaken by the scary market volatility, he stuck to basic investment principles, such as spreading his money around many different types of assets, investing only in good companies and funneling a set amount of money each month into stocks, a strategy called dollar-cost averaging.
"Too many people invest on emotions rather than just investing in stable companies that consistently post profits and pay dividends," Patel says, adding that stocks remain one of the few places investors can get a decent return these days.
Donna Bischoff, 59, a self-described "slow and steady" investor from New Orleans, has regained all but 0.2% of losses she suffered in the downturn — thanks to building a diversified portfolio, avoiding speculative stocks and sticking with her buy-and-hold strategy in bad times.
"I got burned in the '90s owning single stocks, and that taught me a lesson about diversification," Bischoff says, adding that she is gradually reducing her stock exposure to better reflect her lower risk tolerance as she nears 60.
•Double-downers. There is an old saying on Wall Street that the best time to buy stocks is when there's blood in the streets.
That's what Paul Davis, 48, did last spring when the Dow looked like it would tumble to zero.
In April 2009, three months after losing his job — and just a month after the market low when fear and panic remained high — Davis invested 90% of a $100,000 401(k) rollover in stocks. It paid off. The $100,000 is now worth $126,000.
Why did Davis take the risk? He had success in the past buying when fear was palpable.
Michael Hartnett, chief global equity strategist at BofA Merrill Lynch, backed the strategy in a recent report. "Long-term investors should always buy 'humiliation' and sell 'hubris,' " he wrote. Stocks are now the "humiliated" asset class.
Margaret Schaefer, 70, a retired educator from Dearborn, Mich., did just that. Near the March 2009 low, she bought a basket of the most hated stocks: financials. She also bought General Motors when the automaker's future was in question. She tripled her money on both.
"CDs and money markets were paying under 2%," says Schaefer. "I was willing to take the risk."
And while the nearly 7% tumble off the recent high was a reminder that stocks can still go down in a hurry, an analysis of how stocks perform after a recession suggests that another 20% bear market decline is unlikely. Going back to 1928, the S&P 500 fell 10% or more six to 18 months after a recession in 10 of 13 cases (77% odds). But the index suffered only a 20%-plus drop five times (38%), says Ned Davis Research.
A correction, or a drop of 10%, is what Bart Ruff, 45, of Lederach, Pa., says is his buy signal.
Says Ruff, "I missed the opportunity to buy at the bottom last year, and I don't need to be overly aggressive right now. But I'll start increasing my stock holdings at around a 10% correction." Ruff had 70% of his money in stocks pre-slump, vs. 56% now.
If another brutal bear market can be ruled out, that's good news for Wendy Hunt, a 37-year-old married mom from Cincinnati. Hunt who turned ultra-defensive in March, says she is back in the stock market.
"We are taking risks again," she says. "We've moved out of the really conservative securities to a large extent and are back with more blue chips than ever."
Carmine Grigoli, chief investment strategist at Mizuho Securities USA, says that is a bullish sign. He expects more individual investors to come back to stocks and resume their normal investment patterns once it becomes clear the improvement in the economy and financial markets is here to stay.
"The more distant the memory of the financial crisis, the less frightening it becomes," he says.
http://www.usatoday.com/money/markets/2010-02-03-realinvestors03_CV_N.htm
The buy-and-hold strategy
The buy-and-hold strategy
Jonathan Chevreau, Financial Post Published: Friday, April 17, 2009
Indeed, when it seemed the market had hit new lows last November, CNBC aired a feature declaring the "death of buy-and-hold," with pundits claiming only suckers hung on through thick and thin. And value-oriented fund company AIC Limited, which still uses the slogan "buy, hold and prosper," has suffered from such derogatory variants as "buy, hold and perspire" or "buy and fold."
But rumours of the death of buy-and-hold may be premature.
The Investment Reporter, a well-regarded newsletter founded in 1941, recently concluded buy-and-hold portfolios do better over the long and short run, citing an academic study (by Lakonishok, Schleifer and Vishny) that looked at returns of actively managed pension funds over six years. It found that, on average, buy-and-hold portfolios beat actively managed portfolios by 0.78% a year, not factoring in taxes, management fees or high cash positions.
A buy-and-hold approach
Dan Richards, president of Strategic Imperatives, says investors have swung from buy-and-hold to frequent trading but either extreme is a "prescription for disaster." He says academic research from Terrence Odean and Brad Barber shows frequent trading hurts investment returns. The two American business professors wrote a seminal article in 1999 called Online Investors: Do the slow die first?
Vancouver financial advisor Clay Gillespie believes buy-and-hold works for various forms of managed money, such as mutual funds, wrap accounts and other fee-based investment management solutions, although it may not always work with stocks. "An individual company may go out of business and thus have a return of zero." With a particular stock, it may be necessary to sell when
Mutual fund companies encourage buy-and-hold, often levying short-term trading penalties on those who trade in and out too often. Typically, fund unitholders buy high and sell low when they switch too often. "It is this multi-percentage point drag that buy-and-hold investors are trying to avoid," says Norm Rothery, chief investment strategist for Dan Hallett & Associates.
Joe Canavan, chairman of Assante Wealth Management, believes fund investors can successfully build portfolios that include both fund managers who use a buy-and-hold approach as well as managers who use a frequent-trading approach. The danger is in trying to do only one or the other, then changing your horses midstream.
That is more likely to result in being "whipsawed," Mr. Canavan says, incurring losses with one strategy, then abandoning that for the opposite approach just as the tide was about to turn.
In his Canadian Capitalist blog, Ottawa-based Ram Balakrishnan advises to "keep faith in buy-and-hold." He reassures readers it's "hard to maintain equanimity in the face of such a steep decline as right now. But what other strategy is there other than buy-and-hold, where almost everyone can have a good shot at reasonable returns? I don't think there is one."
Unlike most advisors, Robert Cable, Toronto-based head of ScotiaMcLeod's Cable Group, is a strong believer in "seasonal" market timing, also called a "sell in May and go away" strategy. While investors may want to emulate Warren Buffett and buy and hold forever, in practice "nobody does it," he says. He recalls asking 300 advisors at a Florida conference how many of their clients had bought and held the same portfolio a decade or more. The only hand that went up represented a client who was literally in a coma following an accident and whose account could not be traded.
"Anyone who goes into investing with the intent of buying and holding virtually always succumbs to outside pressures to abandon the strategy. My guess is when we have nobody believing in buy-and-hold again, we will again be ready for one big bull market to take off," says Mr. Cable.
Markham-based advisor Robert Smith says buy-and-hold works, but not in isolation. Investors need
"If the investor follows all these requirements, buy-and-hold will not fail them," Mr. Smith says.
Read more: http://www.financialpost.com/story.html?id=1507182#ixzz0eYEmvC9K
The Financial Post is now on Facebook. Join our fan community today.
http://www.financialpost.com/story.html?id=1507182
Comment: My personal experience of 20 years, buy and hold is safe for selected stocks.
Jonathan Chevreau, Financial Post Published: Friday, April 17, 2009
Among the many casualties of the great bear market of 2008-09 may be the buy-and-hold strategy or the Warren Buffett approach of buying good businesses and waiting patiently for the market's perception of their value to catch up.
Indeed, when it seemed the market had hit new lows last November, CNBC aired a feature declaring the "death of buy-and-hold," with pundits claiming only suckers hung on through thick and thin. And value-oriented fund company AIC Limited, which still uses the slogan "buy, hold and prosper," has suffered from such derogatory variants as "buy, hold and perspire" or "buy and fold."
But rumours of the death of buy-and-hold may be premature.
The Investment Reporter, a well-regarded newsletter founded in 1941, recently concluded buy-and-hold portfolios do better over the long and short run, citing an academic study (by Lakonishok, Schleifer and Vishny) that looked at returns of actively managed pension funds over six years. It found that, on average, buy-and-hold portfolios beat actively managed portfolios by 0.78% a year, not factoring in taxes, management fees or high cash positions.
A buy-and-hold approach
- minimizes commissions and tax events and, naturally,
- lowers the chances of mistiming the market.
Dan Richards, president of Strategic Imperatives, says investors have swung from buy-and-hold to frequent trading but either extreme is a "prescription for disaster." He says academic research from Terrence Odean and Brad Barber shows frequent trading hurts investment returns. The two American business professors wrote a seminal article in 1999 called Online Investors: Do the slow die first?
Vancouver financial advisor Clay Gillespie believes buy-and-hold works for various forms of managed money, such as mutual funds, wrap accounts and other fee-based investment management solutions, although it may not always work with stocks. "An individual company may go out of business and thus have a return of zero." With a particular stock, it may be necessary to sell when
- there are changes in one's personal situation, retirement, for example, and
- it's advisable to reduce volatility.
- Portfolio rebalancing may also require some tweaks in the buy-and-hold approach.
Mutual fund companies encourage buy-and-hold, often levying short-term trading penalties on those who trade in and out too often. Typically, fund unitholders buy high and sell low when they switch too often. "It is this multi-percentage point drag that buy-and-hold investors are trying to avoid," says Norm Rothery, chief investment strategist for Dan Hallett & Associates.
Joe Canavan, chairman of Assante Wealth Management, believes fund investors can successfully build portfolios that include both fund managers who use a buy-and-hold approach as well as managers who use a frequent-trading approach. The danger is in trying to do only one or the other, then changing your horses midstream.
That is more likely to result in being "whipsawed," Mr. Canavan says, incurring losses with one strategy, then abandoning that for the opposite approach just as the tide was about to turn.
In his Canadian Capitalist blog, Ottawa-based Ram Balakrishnan advises to "keep faith in buy-and-hold." He reassures readers it's "hard to maintain equanimity in the face of such a steep decline as right now. But what other strategy is there other than buy-and-hold, where almost everyone can have a good shot at reasonable returns? I don't think there is one."
Unlike most advisors, Robert Cable, Toronto-based head of ScotiaMcLeod's Cable Group, is a strong believer in "seasonal" market timing, also called a "sell in May and go away" strategy. While investors may want to emulate Warren Buffett and buy and hold forever, in practice "nobody does it," he says. He recalls asking 300 advisors at a Florida conference how many of their clients had bought and held the same portfolio a decade or more. The only hand that went up represented a client who was literally in a coma following an accident and whose account could not be traded.
"Anyone who goes into investing with the intent of buying and holding virtually always succumbs to outside pressures to abandon the strategy. My guess is when we have nobody believing in buy-and-hold again, we will again be ready for one big bull market to take off," says Mr. Cable.
Markham-based advisor Robert Smith says buy-and-hold works, but not in isolation. Investors need
- proper asset allocation geared to their risk tolerance,
- portfolios must be well-diversified and
- investments can't have been purchased at bubble-like prices.
- They also need to buy during the tough times to bring down their average costs, he says.
"If the investor follows all these requirements, buy-and-hold will not fail them," Mr. Smith says.
Read more: http://www.financialpost.com/story.html?id=1507182#ixzz0eYEmvC9K
The Financial Post is now on Facebook. Join our fan community today.
http://www.financialpost.com/story.html?id=1507182
Comment: My personal experience of 20 years, buy and hold is safe for selected stocks.
Wednesday 3 February 2010
Stock Market Strategy: "One-day trade, Swing trade or Long-term trade"
Stock Market Strategy
Stock market is a risky place to make a profit.
Who are these players generating all this trade -speculating or investing - in the stock market?
There are many types of trades in the stock market. However, essentially the three most popular of them are:
It is common to think that the swing trade has a time horizon between the one-day trade and the long-time trade. The time horizon of a swing trade is dependent on the event(s) influencing the player to terminate the trade.
The more astute would notice that all these types are characterized by a single factor (risk tolerance profile) of the players: their ability to hold onto their position in the stock market for various investing time frames.
The beauty of the stock market is that it can be used for various purposes by different investors.
http://www.assetinvesting.com/?p=4473
Stock market is a risky place to make a profit.
Who are these players generating all this trade -speculating or investing - in the stock market?
There are many types of trades in the stock market. However, essentially the three most popular of them are:
1. One-day trade
2. Swing trade
3. Long-time trade.
It is common to think that the swing trade has a time horizon between the one-day trade and the long-time trade. The time horizon of a swing trade is dependent on the event(s) influencing the player to terminate the trade.
The more astute would notice that all these types are characterized by a single factor (risk tolerance profile) of the players: their ability to hold onto their position in the stock market for various investing time frames.
The beauty of the stock market is that it can be used for various purposes by different investors.
http://www.assetinvesting.com/?p=4473
Monday 1 February 2010
Time, and not timing, is the key to successful investment.
So who has the best chance of success?
Another approach is to disregard the risks of market timing and to ask how great the benefits would have been if an investor's timing had been right.
Let us take a hypothetical situation of 3 people who invested a fixed amount every year for 20 years.
The compound return earned by
It is
Although there are times when you should be more heavily invested,
Another approach is to disregard the risks of market timing and to ask how great the benefits would have been if an investor's timing had been right.
Let us take a hypothetical situation of 3 people who invested a fixed amount every year for 20 years.
- Person A is extremely lucky and annually invests at a market low, as determined by a particular Stock Market Share Index (JSE All Share Index).
- Person B is unlucky and annually invests at a market high.
- Person C invests on a 'random' date every year, in this case 31st January.
The compound return earned by
- person A over the period is 14.0% a year,
- while in the case of person B it amounts to 11.3%.
- person C achieved a return of 12.9% a year.
It is
- not surprising that an investment at a market low achieved a better return than an investment at a market high, but
- the difference in return between the high and the low/'random' date is less than expected.
Although there are times when you should be more heavily invested,
- the risk of underperformance increases considerably if you are continually with-drawing from and returning to the market.
Thursday 28 January 2010
****3 Steps To Profitable Stock Picking
3 Steps To Profitable Stock Picking
Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.
Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.
Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.
If you decide to be a short term investor, you would like to adhere to one of the following strategies:
a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.
b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.
Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.
Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.
These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a of confidence that helps you to make better trading decisions.
http://tradingindicator.blogspot.com/2010/01/3-steps-to-profitable-stock-picking.html
Comment: There are many ways to make money. Investing for the long term is profitable for many investors. Some of those who employ other strategies can also be profitable too.
Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.
Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.
Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.
If you decide to be a short term investor, you would like to adhere to one of the following strategies:
a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.
b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.
Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.
Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.
These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a of confidence that helps you to make better trading decisions.
http://tradingindicator.blogspot.com/2010/01/3-steps-to-profitable-stock-picking.html
Comment: There are many ways to make money. Investing for the long term is profitable for many investors. Some of those who employ other strategies can also be profitable too.
Wednesday 27 January 2010
Buy and Hold vs. Market Timing: Some personal observations
Short term traders do not hold their stocks for too long. They often take their profit. They then plough them back into another new trade when they perceive the upside is better than the downside. They are not the buy and hold types. To them, rightly so, buy and hold is a very dangerous strategy, especially so too if they are not picking carefully the stocks they trade in. Short term trends are totally unpredictable. They react to graphs depicting volumes and prices; searching for and attributing meanings to these.
When the market is on the uptrend, everyone benefits. Postings were similarly optimistic. "Why I like stock XXX?" "Why I like stock XYZ, very much?"... Blah. Blah. Blah. Now that the market has shown some volatilites and uncertainties, the postings turned pessimistic. "Beware the black swan..." Blah. Blah. Blah. Such thinking is typical of a market timer.
Yet, the reality is: No one can predict the market with any certainty. If he can, he will own the world. But one should invest with some knowledge of the probabilities of likely outcomes. Even more importantly, is knowing the consequences arising from these probabilities, however unlikely these maybe. Nassim Taleb is right to point these "fatal downsides" of unintelligent or emotional investing in his two classic books.
Let me share with you a "well known' secret. Do you know that the richest persons in the world are all mostly "buy and hold" type investors? Look at the KLSE bourse. Who owns the major wealth in the KLSE? Lee family of KLK, Lim family of Genting, Yeoh family of YTL, Teh family of PBB, Lim family of TopGlove, Lee family of IOI, ....... They are the major shareholders of the good quality successful companies. Do they buy and sell their shares in their companies regularly? Do they make more of their money from trading their shares or from holding onto their shares over a very very long period?
Buy and hold is safe. It is very safe for those with a long term investing horizon. However, there is one provision: You need to be in the right stock. You will need to be a stock-picker. Pick the good quality successful companies and you will have few reasons to sell them.
Buy and hold is certainly very safe for selected stocks. Do not react emotionally to price volatilities. Price volatility is your friend to be taken advantage of: giving you the opportunity to buy these companies at a bargain and to sell them if they are overpriced. Often, the price is correct and fair, and you need not do anything. For the super-rich whose wealth are locked in a "buy and hold" mode for umpteen years in their good quality successful companies, this strategy has benefitted them immensely. If they can grow rich, so can you. After all, you can be a co-owner in their companies. Think about this and you may wish to follow them too, buying into their companies at fair or bargain prices. For this, you will need to be rewired appropriately.
When the market is on the uptrend, everyone benefits. Postings were similarly optimistic. "Why I like stock XXX?" "Why I like stock XYZ, very much?"... Blah. Blah. Blah. Now that the market has shown some volatilites and uncertainties, the postings turned pessimistic. "Beware the black swan..." Blah. Blah. Blah. Such thinking is typical of a market timer.
Yet, the reality is: No one can predict the market with any certainty. If he can, he will own the world. But one should invest with some knowledge of the probabilities of likely outcomes. Even more importantly, is knowing the consequences arising from these probabilities, however unlikely these maybe. Nassim Taleb is right to point these "fatal downsides" of unintelligent or emotional investing in his two classic books.
Let me share with you a "well known' secret. Do you know that the richest persons in the world are all mostly "buy and hold" type investors? Look at the KLSE bourse. Who owns the major wealth in the KLSE? Lee family of KLK, Lim family of Genting, Yeoh family of YTL, Teh family of PBB, Lim family of TopGlove, Lee family of IOI, ....... They are the major shareholders of the good quality successful companies. Do they buy and sell their shares in their companies regularly? Do they make more of their money from trading their shares or from holding onto their shares over a very very long period?
Buy and hold is safe. It is very safe for those with a long term investing horizon. However, there is one provision: You need to be in the right stock. You will need to be a stock-picker. Pick the good quality successful companies and you will have few reasons to sell them.
Buy and hold is certainly very safe for selected stocks. Do not react emotionally to price volatilities. Price volatility is your friend to be taken advantage of: giving you the opportunity to buy these companies at a bargain and to sell them if they are overpriced. Often, the price is correct and fair, and you need not do anything. For the super-rich whose wealth are locked in a "buy and hold" mode for umpteen years in their good quality successful companies, this strategy has benefitted them immensely. If they can grow rich, so can you. After all, you can be a co-owner in their companies. Think about this and you may wish to follow them too, buying into their companies at fair or bargain prices. For this, you will need to be rewired appropriately.
Tuesday 26 January 2010
Buy and Hold vs. Market Timing
Buy and Hold = Select your stocks for your portfolio and hold.
Stock picking is easier than timing whole market.
Nobody can predict the future.
Even a broken clock is right twice a day.
What's luck got to do with it?
Is this person skillful or lucky?
For every action, there's an opposite reaction.
Buyers & Sellers, Bulls & Bears: that is what makes the markets.
The higher the risk, the higher the expected return.
http://video.yahoo.com/watch/3913819
Stock picking is easier than timing whole market.
Nobody can predict the future.
Even a broken clock is right twice a day.
What's luck got to do with it?
Is this person skillful or lucky?
For every action, there's an opposite reaction.
Buyers & Sellers, Bulls & Bears: that is what makes the markets.
The higher the risk, the higher the expected return.
http://video.yahoo.com/watch/3913819
Wednesday 13 January 2010
What's in store for investors next?
If we should have learned anything from the past 10 years, it is that valuation matters.
In a dynamic world, a static portfolio is by definition a fatally flawed strategy.
The price of investment success is constant vigilance.
The advice to buy and hold long term begs a critical question: buy and hold what?
In a dynamic world, a static portfolio is by definition a fatally flawed strategy.
The price of investment success is constant vigilance.
The advice to buy and hold long term begs a critical question: buy and hold what?
Thursday 24 December 2009
The Worst Decade for Stocks ... Ever
The Worst Decade for Stocks ... Ever
By Alex Dumortier, CFA
December 23, 2009
According to data compiled by Yale finance professor William Goetzmann, U.S. stocks will very likely close out the worst calendar decade in recorded history this month (Goetzmann's data goes back to the 1820s). That's a harsh lesson for buy-and-hold investors: Yes, stocks are very often an attractive asset class, but not always ... and certainly not at any price. But what of the next 10 years?
First, the gruesome context:
Decade
Annualized Nominal Return (incl. dividends)
Annualized After-Inflation Return (incl. dividends)
2000s*
(1%)
(3.4%)
1990s
18.2%
14.8%
*To Dec. 21, 2009.
Source: Author's calculation based on data from Standard & Poor's and the Bureau of Labor Statistics.
It was the best of times, it was the worst of times
This decade's horrendous performance follows one of the best calendar decades for stocks. In the 1990s, stocks roared ahead (of themselves), boosted by the Internet revolution and a favorable economic environment. This succession of near best and worst decades is no coincidence -- it's an illustration of Jeremy Grantham's observation that "mean reversion is a reality"; i.e., periods characterized by above-average historical returns are generally followed by periods of below-average historical returns.
Valuation: a sorcerer's apprentice
The reason for these swings in performance? Valuation, largely. Stocks got a huge boost from multiple expansion in the 1990s; according to data compiled by Yale finance professor Robert Shiller, the cyclically adjusted price-to-earnings ratio rose from 17.65 in December 1989 (a bit above the historical average) to 44.2 in December 1999 -- an all-time high. (The cyclically adjusted P/E multiple is based on average earnings over the prior 10-year period). That multiple could not defy gravity eternally; odds were good that stock returns over the next 10 years would be disappointing.
And that's exactly what came to pass. Not surprisingly, among the bottom 5% of S&P 500 stocks in terms of performance during this decade, technology and financials are the best represented sectors, while the top 5% is heavy with energy companies:
Company
Annualized 10-Year Return (incl. dividends) to Dec. 21, 2009
S&P 500 Top 5% Performers*
XTO Energy (NYSE: XTO)
52.3%
Southwestern Energy (NYSE: SWX)
50.5%
Denbury Resources (NYSE: DNR)
30%
S&P 500 Bottom 5% Performers*
Citigroup (NYSE: C)
(19.7%)
Akamai Technologies (Nasdaq: AKAM)
(22.6%)
E*Trade Financial (Nasdaq: ETFC)
(23.7%)
Sun Microsystems (Nasdaq: JAVA)
(24.5%)
*Selection.
Source: Author's calculations based on data from Capital IQ, a division of Standard & Poor's.
What's in store for investors next?
Surely after a period of such miserable returns, we can now look forward to great returns over the next 10 years? Unfortunately not -- unless you're betting on another massive stock market bubble. If we should have learned anything from the past 10 years, it is that valuation matters. At yesterday's closing price, the S&P 500 is valued at 20.3 times cyclically adjusted earnings -- nearly 25% above its long-term historical average multiple. Asset manager GMO's latest return forecasts, produced at the end of November, have large-cap and small-cap U.S. stocks earning less than 4.5% on an annualized basis over the next seven years. Index investors should be underweight U.S. stocks right now -- international equities are an attractive alternative.
The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.
http://www.fool.com/investing/general/2009/12/23/the-worst-decade-for-stocks-ever.aspx
By Alex Dumortier, CFA
December 23, 2009
According to data compiled by Yale finance professor William Goetzmann, U.S. stocks will very likely close out the worst calendar decade in recorded history this month (Goetzmann's data goes back to the 1820s). That's a harsh lesson for buy-and-hold investors: Yes, stocks are very often an attractive asset class, but not always ... and certainly not at any price. But what of the next 10 years?
First, the gruesome context:
Decade
Annualized Nominal Return (incl. dividends)
Annualized After-Inflation Return (incl. dividends)
2000s*
(1%)
(3.4%)
1990s
18.2%
14.8%
*To Dec. 21, 2009.
Source: Author's calculation based on data from Standard & Poor's and the Bureau of Labor Statistics.
It was the best of times, it was the worst of times
This decade's horrendous performance follows one of the best calendar decades for stocks. In the 1990s, stocks roared ahead (of themselves), boosted by the Internet revolution and a favorable economic environment. This succession of near best and worst decades is no coincidence -- it's an illustration of Jeremy Grantham's observation that "mean reversion is a reality"; i.e., periods characterized by above-average historical returns are generally followed by periods of below-average historical returns.
Valuation: a sorcerer's apprentice
The reason for these swings in performance? Valuation, largely. Stocks got a huge boost from multiple expansion in the 1990s; according to data compiled by Yale finance professor Robert Shiller, the cyclically adjusted price-to-earnings ratio rose from 17.65 in December 1989 (a bit above the historical average) to 44.2 in December 1999 -- an all-time high. (The cyclically adjusted P/E multiple is based on average earnings over the prior 10-year period). That multiple could not defy gravity eternally; odds were good that stock returns over the next 10 years would be disappointing.
And that's exactly what came to pass. Not surprisingly, among the bottom 5% of S&P 500 stocks in terms of performance during this decade, technology and financials are the best represented sectors, while the top 5% is heavy with energy companies:
Company
Annualized 10-Year Return (incl. dividends) to Dec. 21, 2009
S&P 500 Top 5% Performers*
XTO Energy (NYSE: XTO)
52.3%
Southwestern Energy (NYSE: SWX)
50.5%
Denbury Resources (NYSE: DNR)
30%
S&P 500 Bottom 5% Performers*
Citigroup (NYSE: C)
(19.7%)
Akamai Technologies (Nasdaq: AKAM)
(22.6%)
E*Trade Financial (Nasdaq: ETFC)
(23.7%)
Sun Microsystems (Nasdaq: JAVA)
(24.5%)
*Selection.
Source: Author's calculations based on data from Capital IQ, a division of Standard & Poor's.
What's in store for investors next?
Surely after a period of such miserable returns, we can now look forward to great returns over the next 10 years? Unfortunately not -- unless you're betting on another massive stock market bubble. If we should have learned anything from the past 10 years, it is that valuation matters. At yesterday's closing price, the S&P 500 is valued at 20.3 times cyclically adjusted earnings -- nearly 25% above its long-term historical average multiple. Asset manager GMO's latest return forecasts, produced at the end of November, have large-cap and small-cap U.S. stocks earning less than 4.5% on an annualized basis over the next seven years. Index investors should be underweight U.S. stocks right now -- international equities are an attractive alternative.
The Fed's policies are creating a new set of tangible risks for investors. Motley Fool Global Gains co-advisor Tim Hanson explains why it's time to get out now.
http://www.fool.com/investing/general/2009/12/23/the-worst-decade-for-stocks-ever.aspx
Friday 23 October 2009
The price of investment success is constant vigilance.
Buying and holding for the long term assumes that one is willing to settle for whatever long-term average return is generated.
Buying and holding for the long term also assumes that one can successfully select a stock, or group of stocks, whose fundamentals will continue intact.
Technology is moving ever more rapidly and for most corporations the relevant competitive context has become worldwide, whether or not they wish it were so. These facts imply that selections of companies likely will not remain valid as long as they could in the past.
In a dynamic world, a static portfolio is by definition a fatally flawed strategy.
Bottom line: One year's favourable and seemingly stable fundamentals are not a given that can be assumed in perpetuity, much as we might wish they could. The price of investment success is constant vigilance.
The advice to buy and hold long term begs a critical question: buy and hold what?
Buying and holding for the long term also assumes that one can successfully select a stock, or group of stocks, whose fundamentals will continue intact.
Technology is moving ever more rapidly and for most corporations the relevant competitive context has become worldwide, whether or not they wish it were so. These facts imply that selections of companies likely will not remain valid as long as they could in the past.
In a dynamic world, a static portfolio is by definition a fatally flawed strategy.
Bottom line: One year's favourable and seemingly stable fundamentals are not a given that can be assumed in perpetuity, much as we might wish they could. The price of investment success is constant vigilance.
The advice to buy and hold long term begs a critical question: buy and hold what?
Monday 19 October 2009
It's Different This Time – Or Is It?
In 2009, the global economy fell into recession and international markets fell in lockstep. Diversification couldn't provide adequate downside protection. Once again, the "experts" proclaim that the old rules of investing have failed. "It's different this time," they say. Maybe … but don't bet on it. These tried and true principles of wealth creation have withstood the test of time.
Did you profit from the best stock rally in the last 10 years?
More specifically, how much of your investment money was in equity in March 2009? One prominent blogger by his admission was 30% or so anxiously invested in first half of this year. But salutation and hooray to those with 80% or more invested in stocks in March 2009. :-)
Sunday 18 October 2009
Sit on Your Assets, if You Can
While most investors associate Buffett and Munger with finding good stocks cheap, Munger points out that quality can trump price.
"If you buy something because it's undervalued, you have to think about selling it when it approaches your calculation of its intrinsic value," he says. "That's hard. But if you buy a few great companies, then you can sit on your ass. That's a good thing."
"If you buy something because it's undervalued, you have to think about selling it when it approaches your calculation of its intrinsic value," he says. "That's hard. But if you buy a few great companies, then you can sit on your ass. That's a good thing."
Monday 14 September 2009
The Buy and Hold Strategy And Your Long Term Investment Horizon
The consequences of the buy and hold investment strategy.
http://www.thedigeratilife.com/blog/index.php/2009/03/20/buy-and-hold-strategy-long-term-investment-horizon/
http://www.thedigeratilife.com/blog/index.php/2009/03/20/buy-and-hold-strategy-long-term-investment-horizon/
Sunday 13 September 2009
8600% gains with a buy and hold strategy
Maximising gains with a buy and hold strategy
Buffett is so confident in his stock-picking ability that he is incline to continue holding an investment perpetually. Rather than lull himself into believing he can win by continually darting in and out of the market.
Buffett believes he can earn and retain more money picking a few choice companies and letting them grow over time.
"All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you hold those shares forever," he told a Forbes reporter in 1990.
To make the point, Buffett's porfolio is concentrated in a small number of companies he has owned for years.
Such patience has paid off.
Few investors can brag of attaining an 8,600 percent return on one investment because so few will hold a stock long enough to maximise the stock's potential.
Even thought the past few years has provided several stocks that surged 8,000 percent within a few years, such as Dell Computer, Qualcom, or America Online, it's doubtful that many investors reaped the full gain.
These stocks rallied so prodigiously because investors flipped them so rapidly. Turnover caused most of the gains. The majority fo investors tripped themselves up playing the market's short-term lottery.
Buffett is so confident in his stock-picking ability that he is incline to continue holding an investment perpetually. Rather than lull himself into believing he can win by continually darting in and out of the market.
Buffett believes he can earn and retain more money picking a few choice companies and letting them grow over time.
"All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you hold those shares forever," he told a Forbes reporter in 1990.
To make the point, Buffett's porfolio is concentrated in a small number of companies he has owned for years.
- - He began accumulating stock in The Washington Post in the mid-1970s until he owned 1,869,000 shares. In 1985, he sold about 10% of his holdings but has kept the remaining 1.727,765 to this day.
- - He continues to hold all 96,000,000 million shares of Gillette bought in 1989. He originally bought a preferred stock that converted into 12,000,000 shares; there have been three splits since.
- - He vows never to sell his 200,000,000 shares of Coca-Cola despite the recent slump in revenues and earnings.
- - Buffett began studying and buying shares of GEICO at the age of 21. He reportedly made a nearly 50 % gain on his first GEICO investment in a single year. Later, when Wall Street belived GEICO was on the verge of bankruptcy, Buffett began accumulating large stakes in the insurer. By 1983, he owned 6.8 million shares, which turned into more than 34 million shares - 51% of the company - by virtue of a 5 for 1 split. In August 1995, he announced he would buy the remaining 49% of GEICO and bring the company under Berkshire's umbrella.
Such patience has paid off.
- - His $45 million investment in GEICO in the 1970s became worth $2.4 billion (a 54-fold increase in 20 years) when Buffett announced he was buying the rest of the company.
- - He has held shares in The Washington Post for 27 years, over which time his $10.6 million investment grew to $930 million by the end of 1999, an 86-fold increase. During a period in which Wall Street's brokerages alternately told investors numerous times to buy and sell The Washington Post, Buffett held on for the maximum gain. Buffett has not paid a dime of capital gains taxes on The Washington Post since he sold a portion of his position in 1985.
Few investors can brag of attaining an 8,600 percent return on one investment because so few will hold a stock long enough to maximise the stock's potential.
Even thought the past few years has provided several stocks that surged 8,000 percent within a few years, such as Dell Computer, Qualcom, or America Online, it's doubtful that many investors reaped the full gain.
These stocks rallied so prodigiously because investors flipped them so rapidly. Turnover caused most of the gains. The majority fo investors tripped themselves up playing the market's short-term lottery.
Sunday 6 September 2009
Is Buy-And-Hold The Strategy For You?
Is Buy-And-Hold The Strategy For You?
03/01/01 03:17:41 PM PST
--------------------------------------------------------------------------------
by RM Sidewitz, Ph.D
--------------------------------------------------------------------------------
Buying and holding stocks may not be the best approach for everyone, especially those who are unwilling to sit back and take large losses while they wait for their stocks to climb back up.
Many investors believe that buy-and-hold is the best strategy to use for the long term when it comes to stocks. However, over a two-year period, someone who buys ABC Corp. stock at $40, sees it rise to $50, decline to $35, and then rise again, this time to $65, is not getting as good an overall return as he or she thinks (Figure 1). Why, you ask? That investor has lost the opportunity to maximize what his money can do because he has chosen to remain in the market.
FIGURE 1: LOST OPPORTUNITY. The investor may think that he or she is using the best strategy possible when using buy-and-hold for the long term. But is it really the best?
SOMETIMES THEY COME BACK
The truth is that buy-and-hold isn't the best approach for everyone. Buy-and-hold means that even when the market is falling and struggling, you sit, waiting for it to rebound to previous heights. That could take a while; it took almost a year for the stock market to return to its previous levels from the 1974 decline, 10 months to come back from the 1994 dip, but almost 24 months to regain the losses from the 1987 stock market correction. This is time that you're spending just waiting to break even.
Look at it another way. If your portfolio falls in value from $10,000 to $8,000 (or $1 million to $800,000, for that matter), it has dropped 20% in value. That means the market will have to rise 25% just for you to get back to where you were before. Waiting to get back to being even creates the phenomenon I refer to as the "involuntary investor."
The underlying premise of buy-and-hold is that it's impossible to invest in a manner that better insulates you from eventual declines, and therefore, it's in your best interest if you just remain patient. "It'll come back," buy-and-hold believers always tell you.
SOMETIMES THEY DON'T
The truth is that not all stocks rebound; some stocks simply die. Among stock favorites of earlier periods, some such as Chrysler (DCX) went through rocky times, documented in detail in the news media, but eventually triumphed, coming back from the dead.
But some others such as Pan Am (PAAN) do not have such a happy ending. Further, in 2000, many so-called long-term investors in Nasdaq-listed companies found the value of their shares continuing to fall as they were waiting for them to come back. Ultimately, the pain became more than they could bear and many investors sold off their holdings at huge losses.
That reaction is understandable; on a very subtle level, you've been told over and over again to never, ever sell! Think about it. When was the last time you heard about or read a sell recommendation from a stock brokerage research department? In fact, according to Zacks Investment Research, of the 8,000 recommendations made by analysts covering the Standard & Poor's 500 index companies in 2000, only 29 were sells. That's less than one-half of 1%!
How can that be? According to Zacks vice president Mitch Zacks: "It's not that they're oblivious to things getting worse [at companies]. But the way an analyst gets fired is to damage an existing investment banking relationship with a company or sour a future investment banking relationship. The way you do that as an analyst is coming out and telling people to sell a stock."
The unavoidable result is that there is simply no one willing to tell you to get out of the market, ever. "You'll miss the next big move if you're not in the market," you're told. You are not told that the price of waiting for the next big move is you have to sit through substantial market declines that erode your assets. That's a big price to pay.
A buy-and-hold strategy for stocks is an investment approach that takes power away from the long-term investor. But there is a better way, which I will explain in my next article.
R.M. Sidewitz is president, chief executive officer, and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.
http://premium.working-money.com/wm/display.asp?art=105
03/01/01 03:17:41 PM PST
--------------------------------------------------------------------------------
by RM Sidewitz, Ph.D
--------------------------------------------------------------------------------
Buying and holding stocks may not be the best approach for everyone, especially those who are unwilling to sit back and take large losses while they wait for their stocks to climb back up.
Many investors believe that buy-and-hold is the best strategy to use for the long term when it comes to stocks. However, over a two-year period, someone who buys ABC Corp. stock at $40, sees it rise to $50, decline to $35, and then rise again, this time to $65, is not getting as good an overall return as he or she thinks (Figure 1). Why, you ask? That investor has lost the opportunity to maximize what his money can do because he has chosen to remain in the market.
FIGURE 1: LOST OPPORTUNITY. The investor may think that he or she is using the best strategy possible when using buy-and-hold for the long term. But is it really the best?
SOMETIMES THEY COME BACK
The truth is that buy-and-hold isn't the best approach for everyone. Buy-and-hold means that even when the market is falling and struggling, you sit, waiting for it to rebound to previous heights. That could take a while; it took almost a year for the stock market to return to its previous levels from the 1974 decline, 10 months to come back from the 1994 dip, but almost 24 months to regain the losses from the 1987 stock market correction. This is time that you're spending just waiting to break even.
Look at it another way. If your portfolio falls in value from $10,000 to $8,000 (or $1 million to $800,000, for that matter), it has dropped 20% in value. That means the market will have to rise 25% just for you to get back to where you were before. Waiting to get back to being even creates the phenomenon I refer to as the "involuntary investor."
The underlying premise of buy-and-hold is that it's impossible to invest in a manner that better insulates you from eventual declines, and therefore, it's in your best interest if you just remain patient. "It'll come back," buy-and-hold believers always tell you.
SOMETIMES THEY DON'T
The truth is that not all stocks rebound; some stocks simply die. Among stock favorites of earlier periods, some such as Chrysler (DCX) went through rocky times, documented in detail in the news media, but eventually triumphed, coming back from the dead.
But some others such as Pan Am (PAAN) do not have such a happy ending. Further, in 2000, many so-called long-term investors in Nasdaq-listed companies found the value of their shares continuing to fall as they were waiting for them to come back. Ultimately, the pain became more than they could bear and many investors sold off their holdings at huge losses.
That reaction is understandable; on a very subtle level, you've been told over and over again to never, ever sell! Think about it. When was the last time you heard about or read a sell recommendation from a stock brokerage research department? In fact, according to Zacks Investment Research, of the 8,000 recommendations made by analysts covering the Standard & Poor's 500 index companies in 2000, only 29 were sells. That's less than one-half of 1%!
How can that be? According to Zacks vice president Mitch Zacks: "It's not that they're oblivious to things getting worse [at companies]. But the way an analyst gets fired is to damage an existing investment banking relationship with a company or sour a future investment banking relationship. The way you do that as an analyst is coming out and telling people to sell a stock."
The unavoidable result is that there is simply no one willing to tell you to get out of the market, ever. "You'll miss the next big move if you're not in the market," you're told. You are not told that the price of waiting for the next big move is you have to sit through substantial market declines that erode your assets. That's a big price to pay.
A buy-and-hold strategy for stocks is an investment approach that takes power away from the long-term investor. But there is a better way, which I will explain in my next article.
R.M. Sidewitz is president, chief executive officer, and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.
http://premium.working-money.com/wm/display.asp?art=105
Saturday 5 September 2009
Buy and Hold Approach - A Personal Experience
Sunday, June 7, 2009
Buy and Hold Approach - My Personal Experience
The Title "Buy and Hold" has been the buzz word in most of the stock market books, articles and related speeches. I am sure many people have reservations about it and I would like to share my personal experience regarding this. Does this approach make sense? Does it really give decent returns?. My answer to the above two questions is a resounding Yes. Like most of the retail investors, I have read many books and articles and each one contained approaches starting from technicals and trading to speculation and fundamentals. But the legends who have made billions always advise investors to buy good stocks and hold for a long term.
We all know that SENSEX reached 21000 in Jan 2008. But all of a sudden, the market euphoria started to recede and markets reversed the trend. In the current phase, I started investing when the SENSEX came down to 17000 thinking that the markets would not go down below 15000 or 16000. This time it was different and we have witnessed one of the worst recessions in history. Many companies which were once considered to be invincible’s have ceased to exist. People panicked and economic activity came to a halt. SENSEX started reaching new lows every day.
Since, I have invested some money when the SENSEX was at 17000, I had no other option but to average the stocks I had by buying continuously as stock prices reached new lows. But what I made sure was to buy the stocks that I believed would perform well over a long term.
Readers might ask why the hell I did not sell all those at that time and buy when the SENSEX came down to 10000 levels repeatedly. Of course I would have done that, had I got the Wisdom of Solomon. Unfortunately I did not and in fact never wanted to predict the impossible. Because, if there are 10 individuals involved in the market, then it is not that difficult to sense the mood of the people and act accordingly. But the stock market is a place where millions of individuals buy and sell and I do not think anyone can predict what would or what would not happen. So, I continued to buy stocks and backed my stock selection as well as the "Buy and Hold" approach.
So, I invested in good companies and waited for appreciation. I sticked with my portfolio of stocks and continued to accumulate but I stopped investing at 13000 as I feared that markets would go down further. It in fact came down to 8000 levels couple of times. During the downtrend, some of my stocks declined even 75 % but I believed that it would eventually go up and at least reach my cost value. I started buying some stocks again at 9000 levels but that’s a separate portfolio. I always wanted to check the performance of my old portfolio. In short I started buying at 17000 and continued to average till 13000. My portfolio was down almost 50 % when the SENSEX was around 8000. Still I believed in full recovery.
Finally the time came. Recession started slowing or at least people believed that way. Bad economic news stopped coming and markets made a rebound. Indian general Elections gave the verdict that markets and investors were looking for. People started buying in heaps and Foreign Institutional Investors pumped in as if there is no tomorrow. All the stocks in my old portfolio started moving up. It has now given a 20% return which means, the portfolio has registered 120% growth from 8000 levels. So, the verdict is "Buy and Hold" approach definitely works and it will give me good returns in next 5 years.
Alternative Approach
There are still people out there to question my wisdom. Of course I too know that I could have stopped buying at 16000 and invested all my money when the SENSEX was 8000 or I could have sold all my stocks at 13000 to limit my losses and ploughed back that money at 8000 levels. There are so many ifs and buts. But according to me, if you are not sure then just hold all your stocks. Never sell stocks for a loss if you believe in those stocks. If you think you have made a mistake in stock selection, then it makes sense to sell it and buy other good stocks. Otherwise it is always good to keep rather than register a loss.
There might be a select few who could have sold at 16000 levels and invested again at 8000 levels and by now they could have made millions. But the percentage of people who does that will not even reach 0.0001 %. So, why bother about them. Just believe in your stock selection and continue to accumulate irrespective of market movements. Hold it till you get the decent returns and sell it as soon as it reaches your expected returns. If not at least we should have the ability to sense the downtrend and sell it before that.
Conclusion
There are many approaches one can take but the approach which is safe with the potential of good return is "Buy and Hold". To do that we need to do couple of things. One is to make sure that we select stocks that are essential to the economy and livelihood with strong market presence and another is not to buy at peak valuation. If we do that, then most often than not, one can reap decent returns if not the best.
Kumaran Seenivasan
www.stockanalysisonline.com
http://www.stockanalysisonline.com/2009_06_01_archive.html
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