Why Buy and Hold Will Always Be a Sound Investing Strategy

The real strategy is: "Buy (a wonderful business at a fair price) and Hold (for as long as the business remains wonderful and the thesis is intact)."

Why Buy and Hold Will Always Be a Sound Investing Strategy

https://myinvestingnotes.blogspot.com/2010/10/why-buy-and-hold-will-always-be-sound.html

It seems like the debate regarding the merits of the "buy-and-hold" investing strategy is alive and well. We always find these discussions amusing, because we believe that it is such a pointless discussion. There is no general argument or case that can be made to support the buy-and-hold strategy or to negate it.

The only true answer to the buy-and-hold argument is it depends on what and/or when you buy-and-hold.

• If you buy the right company at the right price, then buy-and-hold is a great strategy. 
• If you buy the wrong company at any price, then the buy-and-hold strategy is a dumb move. 
• Also, if you buy the right company at the wrong price, then buy-and-hold would once again be a bad move.

======

Let's analyse, comment, and discuss the provided text and the broader debate.

Analysis of the Provided Text

The text presents a contrarian and pragmatic view that challenges the dogmatic, one-size-fits-all application of "buy and hold." Its core argument can be broken down as follows:

1. Rejection of a General Rule: The author finds the debate "pointless" because they believe there is no universal truth about buy-and-hold. It is not inherently "sound" or "unsound."

2. The Critical Variables: The success of the strategy depends entirely on two factors:

   • what you buy: The quality of the underlying asset (the company).

   • when you buy it: The price you pay (the valuation).

3. The Three Scenarios: The author provides a simple but powerful matrix to illustrate their point:

   • Right Company + Right Price = Great Strategy

   • Wrong Company + Any Price = Dumb Strategy

   • Right Company + Wrong Price = Bad Strategy

This perspective shifts the focus from the strategy itself to the execution of the strategy by the investor.

Commentary and Discussion

The provided text is both insightful and incomplete. Let's expand on its points and introduce crucial nuances.

1. The Text is Correct: "Buy and Hold" is Not a Magic Incantation.

The author is absolutely right to emphasize that blindly holding any asset forever is a recipe for disaster. History is littered with examples of "blue-chip" companies that failed (e.g., Eastman Kodak, Blockbuster, Lehman Brothers). An investor who held these to zero would have learned a painful lesson.

• The Fallacy of "Diworsification": This term, coined by Peter Lynch, describes adding poor-quality companies to a portfolio under the guise of diversification. Buying and holding these "wrong companies" destroys wealth.

• Valuation Matters: Paying an extreme premium for even a fantastic company can lead to a decade or more of underwhelming returns. The classic example is the NASDAQ in 2000; it took 15 years to recover its peak, despite being full of companies that would go on to dominate the world (like Cisco and Amazon).

2. What the Text Misses: The True Spirit of "Buy and Hold"

The text critiques a simplistic version of buy-and-hold. The sophisticated version, as practiced by legends like Warren Buffett and Charlie Munger, already incorporates the author's warnings. For them, "buy and hold" is the conclusion, not the starting point.

The real strategy is: "Buy (a wonderful business at a fair price) and Hold (for as long as the business remains wonderful and the thesis is intact)."

This refined version addresses the text's concerns:

• "What you buy" is defined as a "wonderful business" with a durable competitive advantage (a wide moat), strong management, and high returns on capital.

• "When you buy" is governed by the discipline of a "fair price," providing a margin of safety.

3. The Enduring Case for (the Refined) Buy and Hold

When executed correctly, buy-and-hold remains sound for several powerful reasons the text overlooks:

• The Power of Compounding: This is the mathematical engine of wealth creation. The longer a quality investment is held, the more exponential the growth becomes. Frequent trading interrupts this process with transaction costs, taxes, and timing errors.

• Tax Efficiency: In most jurisdictions, long-term capital gains are taxed at a lower rate than short-term trades. Holding for the long term defers and reduces tax liabilities, allowing more capital to compound.

• Reduction of Behavioral Errors: This is perhaps the most critical point. Buy-and-hold is as much a behavioral strategy as a financial one. It forces the investor to ignore short-term market noise, volatility, and the emotions of fear and greed, which are the primary causes of underperformance for most active traders.

• Acceptance of Market Efficiency (and Inefficiency): It's incredibly difficult to consistently time the market. Buy-and-hold acknowledges this. Instead of trying to guess the peaks and troughs, you simply own quality assets and let the general upward trend of the global economy and corporate earnings work in your favor over time.

Synthesis and Conclusion

The debate is not really "buy-and-hold vs. active trading." The real debate is "disciplined investing vs. speculative gambling."

The provided text serves as a crucial warning against passive, unmonitored holding. A true "buy-and-hold" investor is not asleep at the wheel. They are constantly checking their premises: Is the company's moat still intact? Has the management changed for the worse? Has the story broken?

Final Verdict:

The statement "Why Buy and Hold Will Always Be a Sound Investing Strategy" is true if we define it as the refined strategy:

It is a sound strategy because it harnesses the undeniable powers of compounding and behavioral discipline, but only when applied to a carefully selected portfolio of high-quality assets acquired at sensible prices.

The provided text correctly argues that the strategy is not sound if applied naively. Its great value is in forcing us to move beyond the slogan and focus on the hard work of security analysis and valuation that must underpin any successful long-term investment, making the "hold" part the easy, rewarding conclusion.

"Buy and Never Sell"

Many people think value investors are long-term investors who "buy and never sell."

When you buy companies with great businesses (with economic moats), you generally do not have to sell and can hold onto them for the long term.  *THIS IS PREMISED ON THE COMPANIES' FUNDAMENTALS REMAINING UNCHANGED.*

HOWEVER, YOU MAY HAVE TO SELL UNDER THESE CONDITIONS:

1.  THE FUNDAMENTALS CHANGE

2.  THE PRICES BECOME TOO EXPENSIVE (OPTIONAL)

3.  THERE ARE BETTER OPPORTUNITIES ELSEWHERE.

😀

Selling is often a harder decision than buying

 Selling is often a harder decision than buying

"If you have bought a good quality stock at bargain or reasonable price, you can often hold forever."

Investing is fun. For every rule, there is always an exception.

The main reasons for selling a stock are:

1. When the fundamental has deteriorated permanently, (Sell urgently)
2. When it is overpriced, whereby the upside gain will be unlikely or very small and the downside loss will be big or certain.

We shall examine reason No. 2 through the property market. The property market is also cyclical. There were periods of booms and dooms.


If you have a good piece of property that is always 100% tenanted and which gives you good consistent return (let's say 2x or 3x risk free FD rates), would you not hold this property forever? The answer is probably yes.

Then, when would you sell this property?

Note that the valuation of property, as with stocks, is both objective and subjective.

Would you sell when someone offered to buy at 500% above your perceived market price?

Probably yes, as this is obviously overpriced. You could cash out and probably easily re-employ the money to earn better returns in another property (or properties) or other assets.

Would you sell when someone offered to buy at 50% above your perceived market price?

Maybe yes or maybe no. You can offer your many reasons.

However, all these will be based on the perceived future returns you can hope to get from this property in the future. This is both objective based on past returns obtained and subjective and speculative on future returns.

However, unlike reason No.1 when you would need to sell urgently to another buyer to prevent sustaining a permanent loss, you need not sell just because someone offered to buy the property at high price. (However, there are also those who "flip properties" for their earnings; they will sell quickly for a quick profit.) You will not suffer a loss but only a diminished return at worse. You can take your time to work out the mathematics.

You maybe surprised that you may still achieve a return higher at a time in the near future by rejecting the present immediate gain based on the present high price offered.

Also, you would need to price in the lost opportunity cost when the property is sold at this price, even though it is 50% above the perceived normal market price. Could you buy a similar quality property with the same sustainable increasing income or return by offering the same price?



Similarly, the same line of thinking can be applied to your selling of shares.

When should you sell your shares?

Yes, definitely when the fundamentals have deteriorated permanently. The business has suffered for various reasons and going forward, the earnings will be permanently impaired and deteriorating.

Yes, when the price is very very overpriced. However, you need not sell your shares in good quality companies that you bought at fair or bargain price. As long as the fundamentals are strong and the business is adding value, selling now at a higher price may mean losing the return that you could have obtained in the future years from owning this stock and the opportunity cost of reinvesting the cash into another stock of similar quality and returns.

Once again, the importance of sound reasoning and doing the mathematics in making a decision whether to sell or not.

Is it not true, that the really big fortunes from common stocks have been garnered by those

• who made a substantial commitment in the early years of a company in whose future they had great confidence and
• who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html




Additional notes:

Other reasons for selling a stock (or property) are:

• To raise cash to reinvest into another asset with better return.
• A certain stock (or property sector) may be over-represented in your portfolio due to recent rapid price rises and you need to reduce its weightage to reduce your risk of over-exposure in this single stock (or property sector).

Footnote:

This is a true story. 

A rich man was approached by a buyer to sell his property. A few neighbouring lots were sold for $1.6 m the last 2 years. 

A buyer asked.  "What offer will ensure that you sell your property to me? Please let me know." 

The unwilling owner replied, "$5 million". There is a lesson here too. :-)

Buy and Hold Works….Until It Doesn’t

by KenFaulkenberry | Portfolio Management

Buy and Hold
Buy and Hold is considered by many to be the holy grail of investing. Its current popularity has become a cult-like strategy that draws criticism to its critics and disdain towards those who dare speak out against the beloved investing strategy.

I’m going to explain why a buy and hold strategy is useful for some investors and a good strategy at certain periods of time. We’re also going to explore why buy and hold is not the best strategy for many investors, and is a poor strategy for everyone at certain periods of time.

Buy and Hold Strategy Definition
Investopedia provides the following definition:

“Buy and hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of fluctuations in the market.”

There are many different ideas of what buy and hold means, but I like this definition because it’s fairly simple. The only wiggle room in the definition is: What is “a long period of time”?

Some investors might consider one year a long period of time. I believe we are living in an era where investors have “short-term-itis”. Many more people would consider 3-5 years a long period of time. This may be because in relationship to 1 year it is long.

However, for our discussion I’m stipulating that a long period of time is 10 years or more. Anything less than that it’s difficult to use reasoning or logic that includes probabilities. The shorter the time period the more randomness and fluctuations affect returns. If your not thinking longer than 10 years, you are not really thinking “long term”.

Advantages of Buy and Hold Investing
Easy to implement. The ultimate in passive investing: buy and hold. Simple as can be?

Saves on taxes. Long term capital gains and dividends are taxed lower than short term capital gains.

Efficient. Saves on commissions, transaction fees, etc.

No Need For Market Analysis. Market timing is avoided, volatility is ignored.

Investment Vehicles Add to Simplicity. Low-cost index and ETF funds are perfect investment vehicles for buy and hold investing.

Disadvantages of Buy and Hold Investing
Premium Prices. Most of the stocks worthy of buying and holding are priced at a premium. (Buying high) If you’re going to buy a stock to hold for more than 10 years, it better be a premium company!

Investor Panic. Many investors who claim to be buy and hold investors change their mind after large losses, leading to large drawdowns. (Selling low)

Volatility is ignored. Volatility is not always a bad word. Many successful value investors look at volatility as opportunities to buy bargains and sell trendy overpriced investments.

Ignoring Market Analysis. Market analysis can determine periods of time where it is problematic to be heavily invested or opportunistic to be aggressive.


“The underlying theory of buy and hold investing denies that stocks are ever expensive, or inexpensive for that matter, investors are encouraged to always buy stocks, no matter what the value characteristics of the stock market happen to be at the time.”
Ken Solow (Buy and Hold is Still Dead)

Find the Best Strategy For YOU
If you are the type of person who has little interest in learning how to invest, buy and hold may be the right strategy for you. The problem is you may not have much interest in your investments until they have major declines in value.

A buy and hold strategy requires equal attention to the “hold” part. You can’t sell after you have a 50% decline and be a true buy and hold investor.

In the long run a true buy and hold passive investor will most likely achieve average rates of return. If you systematically invest over your lifetime you will make purchases at bargain prices and at expensive prices. It may all equal out.

A buy and hold strategy does well in bull markets when stocks are consistently rising. But the reality of the stock market is that stocks go through long periods where values decline or stay flat. Sometimes these periods last a couple of decades. Usually these periods are preceded by periods when stocks become very expensive and overvalued when compared to their historical relationships to earning, cash flow, book value, etc.

For an investor willing to make the effort it makes no sense to take the same approach to buying stocks when they are bargains versus when they are expensive. An investment has more upside and less risk when its price is low. That same investment has less upside and greater downside risk when the price is expensive.

“In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices.”
James Grant

This kind of behavior makes no sense. Therefore, buy and hold passive investing works when prices are bargains or even fairly valued. At any other time, your probability of success is greatly reduced.

So buy and hold works….until it doesn’t. People will quote all kinds of statistics “proving” that buy and hold works. Its the trend of our day. This is nothing new. Bull markets make buy and hold look good. Bear markets make buy and hold look bad.

Consider where you think we are in the valuation cycle before you make your buy and hold investing strategy decision!



https://www.arborinvestmentplanner.com/buy-and-hold-strategy-definition-advantages-disadvantages/

Buy and Hold? Really? Depends on your AGE and NEEDS

How should you choose between stocks and bonds?

Financial advisors are risk averse.  Their risk aversion may have less to do with your financial situation than their reputations.  Conventional wisdom is that a portfolio that is invested one-third in bonds and two-thirds in stocks is the way to go irrespective of the level of your assets.  The one-third, two-thirds formula is the standard.  It is safe because that is what the herd recommends.

The conventional model of portfolio construction, the one-third bonds two-thirds stocks, requires that you periodically rebalance your holdings.  By this, they mean that if your stocks had a particularly great year and now are 75% or 80% of your portfolio, you should sell some stocks and invest the proceeds in more bonds.  That is like selling your winners and reinvesting in your losers. 

• How smart is that?  
• If you already have enough cash to ride out three down years, why do you need more?

The major brokerage houses issue "asset allocation" formulas depending on their view of the stock market in the near term.  This sounds like market timing.  
However, people are different.  Your financial assets and your needs vary tremendously.  

• What if you have a lot of dollars and need only a pittance to maintain your lifestyle?  
• Why would you invest one-third of your money in an under-performing asset?

The two most important considerations in formulating an asset allocation formula are:

• age.  and
• how much money you have to support your desired lifestyle.

Jeremy Siegel's book - Stocks for the Long Run

In every rolling 30-year period between 1871 and 1992, stocks as measured by an index, beat bonds or cash in every period.  

In rolling 10-year periods, stocks beat bonds or cash 80% of the time.  

Bonds and cash did not beat the rate of inflation over 50% of the time.  



So why would anyone own a bond?  The answer comes back to age and need.

If you are young (20 years to 35 years) and have a job that pays your bills, you can take a long view on investments.

A lot of what you do in investing is just simple common sense.  Many investors think they should be proactive and keep looking for ways to tweak their investment portfolio when just sitting tight, if they made the correct choices in the first place, often would be the better course.





Examples: 

Asset allocation is based on age and need.

1.  A friend liquidated an asset and wished to invest in the stock market.  However, he will need this money for a project he is working on at end of the year.   He should not invest this money in stock, as his need for the money did not anticipate any setback in the stock market.  If he could not be in for the long term, he should not be in.

2.  In early 1980s, a widow inherited a $4 million account with an investment firm and in addition $30 million of Berkshire Hathaway stock.  She anticipated retiring and needed some income going forward.  She had lived comfortably but modestly, given her wealth.   The reason she was so rich was because all her assets had been well invested in stocks.  Her accountant replied that she had all her assets in the stock market which was, by definition, risky. He suggested a charitable remainder trust into which she could put the Berkshire stock, sell it without paying any capital gains taxes, and reinvest the proceeds in bonds for current income.   On the other hand, her investment advisor replied even if the stock market dropped 50%, she had enough money to live comfortably until her very old age and asked why she would want to stop enjoying the benefits of future appreciation. She decided to leave everything as it was and received her income needs out of the money she had invested with the investment firm.   A number of years later, she reviewed her plan.  She had $180 million.  Today, she has upward of $300 million.  

The Buy and Hold strategy may not always be the best investment strategy.

The Buy and Hold strategy may not always be the best investment strategy.

It is vital in stock investing to constantly check the company's fundamental well being, it's strategic direction, it's ability to manouver market downturn / sector specific challenges and it's growth prospects. Ignorance and negligence will cause damage to your wealth!
.
.
The following are some large cap names in KLSE across various sectors that have had massive value erosion over the past decade.



.
.
Did you invest in any of them? Can they turn around the tide? What about your investments? Have you checked if they can weather the recent crisis? Which other stock has the potential to be on this list?


Reference  Stockbit Malaysia

Website: https://my.stockbit.com
iOS: https://apps.apple.com/us/app/stockbit/id1184800207
Android: https://play.google.com/store/apps/details?id=com.stockbit.android

FB: https://www.facebook.com/stockbitmalaysia
Instagram: https://instagram.com/stockbitmy
Twitter: https://twitter.com/StockbitMy

Some stocks will perform better than others and these "stunners" will dominate the investor's portfolio.

You won’t improve results by pulling out the fl owers and watering
the weeds.— Peter Lynch, ONE UP ONWALL STREET


For an investor who—like Keynes and Buffett—adopts a buy-and-hold policy in respect of stocks, portfolio concentration is something that tends to happen naturally over time. 

Inevitably, some stocks within a portfolio will perform better than others and these “stunners” will come to constitute a large proportion of total value. A policy of portfolio concentration cautions against an instinctive desire to “re-balance” holdings just because an investor’s stock market investments are dominated by a few companies.

Buffett illustrates this point with an analogy. If an investor were to purchase a 20 percent interest in the future earnings of a number of promising basketball players, those who graduate to the NBA would eventually represent the bulk of the investor’s royalty stream. Buffett says that:

To suggest that this investor should sell off portions of his most successful investments simply because they have come to dominate his portfolio is akin to suggesting that the Bulls trade Michael Jordan because he has become so important to the team.

Buffett cautions against selling off one’s “superstars” for the rather perverse reason that they have become too successful. 

The decision to sell or hold a security should be based solely on an assessment of the stock’s expected future yield relative to its current quoted price, rather than any measure of past performance  

Uses of Common Stocks: as storehouse of value, to accumulate capital and as a source of income

Basically, common stocks can be used as:

1.  a "storehouse" of value,
2.  a way to accumulate capital, and,
3.  a source of income.


Storage of value

Storage of value is important to all investors, as nobody like to lose money.

However, some investors are more concerned about losses than are others.

They rank safety of principal as their most important stock selection criterion.

These investors are more quality-conscious and tend to gravitate toward blue chips and other non-speculative shares.


Accumulation of capital

Accumulation of capital, in contrast, is generally an important goal to those with long-term investment horizons.

These investors use the capital gains and/or dividends that stocks provide to build up their wealth.

Some use growth stocks for this purpose, while others do it with income shares, and still others us a little of both.


Source of income

Finally, some investors use stocks as a source of income.

To them, a dependable flow of dividends is essential.

High-yielding, good-quality income shares are usually their preferred investment vehicle.




Individual investors can use various investment strategies to reach their investment goals.

These include:

1. buy and hold,
2. current income,
3. quality long term growth,
4. aggressive stock management, and 
5. speculation and short term trading.

The first 3 strategies appeal to investors who consider storage of value important.

Depending on the temperament of the investor and the time he or she has to devote to an investment program, any of these strategies might be used to accumulate capital.

In contrast, the current income strategy is the logical choice for those using stocks as a source of income.

Making investing enjoyable, understandable and profitable...*

Is it not true, that the really big fortunes from common stocks have been garnered by those who made a substantial commitment in the early years of a company in whose future they had great confidence and who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."  

 
------------------


BENJAMIN GRAHAM'S 113 WISE WORDS
The true investor scarcely ever is forced to sell his shares, and at all times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgement."

 
-----------------
 
PHILIP FISHER'S WISE WORDS
"The refusal to sell at a loss, while completely natural and normal, is probably one of the most dangerous in which we can indulge ourselves in the entire investment process.

More money has probably been lost by investors holding a stock they really did not want until they could 'at least come out even' than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous."

(Common Stocks and Uncommon Profits)

 
--------------------


Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?