The Wall Street Journal's Jason Zweig shares his unique perspective on buy and hold investing, concluding that one should look at it differently.
Is buy and hold dead?
I don't think it is right.
That is exactly what people say right before buy and hold comes back to life.
Nobody says that when the Dow was over 14,000 when buy and holding was a dangerous idea.
They only started saying this when the Dow was nearer 8,000.
But it is cheap now and it is inconceivable that buy and hold is a bad idea at Dow 8,000 than at Dow 14,000.
What about the idea of the market being in a long term bear market that could go on for years, like from 1966 to 1982?
Anytime you buy, it is going to take you years to get back to where you were and people should invest more actively.
We may enter at a protracted period when the returns from the market are below average, that doesn't mean that more active trading in and out of stocks are going to increase your returns.
Though the trading costs are lower now than before, the costs are still real.
If you can buy and hold through a protracted period of low returns, the flip side to this is, you are buying at lower market valuation than before.
People who bought and held from 1966 to 1982, or from 1929 to 1940s and 1950s, did quite well.
It was the people who only held who suffered.
If you are going to retire, you had a big problem.
But if you are younger, buying and holding is a spectacular idea.
But when people said to buy and hold, they do not mean, buy once and then do not put another dime in, and wait for it to go up.
They mean buying steadily, not trying to decide where you think the bottom has bottomed, but keep buying at lower prices regularly.
Maybe we should not talk about investing. Instead use the term savings.
If you think of putting money into the financial market in the form of savings, you don't expect to get your returns right away.
You expect to get it over time and certainly that tricks people up.
Certainly, the returns had been terrible recently and if it is going to pay off, you must give it time.
https://www.youtube.com/watch?v=Z48xR-TBL-8
Showing posts with label buy and hope. Show all posts
Showing posts with label buy and hope. Show all posts
Friday, 7 March 2014
Thursday, 9 August 2012
Buy and Hold: Still Alive and Well
By Morgan Housel
August 7, 2012
Meet Bill. He invested $10,000 in an S&P 500 (INDEX: ^GSPC ) index fund 10 years ago and checked his account balance for the first time yesterday morning. He's elated to see his investment is now worth $19,590 after all dividends were reinvested.
Bill knows a thing or two about market history. He knows that, historically, he earned a good return -- 7% a year, or close to average. He remembers that during that decade we endured two wars, a housing bubble, a collapse of the financial system, the worst recession since the Great Depression, 10% unemployment, a near shutdown of the government, a downgrade of U.S. debt, and Justin Bieber. Through it all, he managed to nearly double his money without lifting a finger.
"Buy and hold works wonders," he thinks to himself.
But then he starts reading market news. Almost without exception, he finds that commentators have declared buy and hold dead, using the last decade as proof.
Buy and Hold Is Dead (Again) is the title of one popular book. "Holding an index or mutual fund for decades will not work for today's investor as spikes in volatility and risk can quickly wipe out any gains," one article warns.
"The only way to make money in the equity market is to be nimble, and that means adopting a strategy that is not buy and hold," he reads. "Buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm," another analyst laments.
"What are these people talking about?" Bill wonders. He spent the decade visiting his kids, taking trips to the beach, reading good books, and enjoying life -- and managed to double his money all the while. These professionals, it seems, spent the decade poring over financial news, trading obsessively, stressing themselves relentlessly, and they're bitter about the market.
Bill knows why they're bitter. They didn't double their money. They likely lost money. Most traders do -- a fact he's well aware of. The only people who think buy and hold is dead, he realizes, are those frustrated with their inability to follow it.
Bill is fictitious, but the numbers and analyst quotes here are real.
Going back to the late 19th century, the average subsequent 10-year market return from any given month is about 9% a year (including dividends). If you rank the periods, the time from August 2002 to August 2012 sits near the middle of the pack. What we've experienced over the last decade has been pretty normal, in other words. This goes against the thousands of colorful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.
And even it understates reality. The S&P 500 is weighted toward the market cap of its components, a quirk that skewed it toward some of the most overvalued companies in the last decade. An equal-weight index -- one that holds every company in equal amounts and provides a better view of how companies actually performed -- returned more than 140% during the decade.
Why have so many declared buy and hold dead? I think it's all about two points.
First, if Bill started investing just two years earlier, his returns through today would be dismal. 2000 was the peak of the dot-com bubble; 2002 was the depth of its aftershock recession. Bill started investing when stocks were cheap, setting him up for good returns today. The majority of today's investors, who likely began investing during the insane late '90s, have fared far worse.
But that doesn't prove buy and hold is dead. It just proves that the deluded interpretation of it -- that you can buy stocks any time at any price and still do well -- is wrong. But it was always wrong. It just became easy to forget during the '90s bubble. For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run. If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke.
Second, most people know that buy and hold means holding for a long time, like 10 or even 20 years ("Our favorite holding period is forever," says Warren Buffett.) But, in an odd mental twist, they use volatility measured in months or even weeks to reason that it doesn't work.
The market suffered all kinds of schizophrenic turns over the last decade. Since 2002, there have been 401 days of the Dow Jones (INDEX: ^DJI ) rising or falling more than 1.5%, and 83 days of it going up or down more than 3%. These can be emotionally devastating for investors following daily market news, watching their wealth surge and crash before their eyes.
But Bill didn't even know about them. He was too busy enjoying his sanity at the beach. He knew he was investing for the long haul, and that he bought at a decent price. Why should he care what stocks do on a daily, monthly, or even yearly basis? While others tumbled through manias and panics, Bill's blissful ignorance was one of his greatest advantages -- as it is for most buy-and-hold investors.
Naysayers of buy-and-hold investing lose track of this to an almost comical degree. The "flash crash" of 2010 sent stocks plunging for 18 minutes before rebounding. Last week'ssnafu by market-maker Knight Capital caused a handful of companies to log some funny quotes for half an hour. These events should be utterly meaningless to long-term investors. Yet the number citing them as proof that buy and hold no longer works is astounding.
Jason Zweig of The Wall Street Journal quoted an investor last week dismayed with the Knight Capital fiasco. "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," he said. The same fear was echoed two years earlier during the Flash Crash.
Folks, accept some frank advice: If you measure your portfolio in five-minute intervals, you shouldn't be investing. If you think business value is "lost" by a few misquoted trades, you shouldn't be investing. Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year. An errant stock trade doesn't make a company less valuable any more than misplacing your birth certificate for 18 minutes makes you less alive.
"There's no such thing as a widows-and-orphans stock anymore," Zweig's investor complains.
Sure there is. Ask Bill.
Also read:
*****Long term investing based on Buy and Hold works for Selected Stocks
Buy and hold until fundamentals change is safe for selected stocks.
The Death Of Buy & Hold Strategy
Saturday, 27 November 2010
Focus on the long term and have the courage to buy more into any dips in the markets."
Dare to be a lone wolf investor
Investors are losing out by chasing performance, according to a new study.
By Paul Farrow 11:27AM GMT 23 Nov 2010
Have you invested in a fund after learning of its stellar gains and thought, "I want a piece of the action"? If so, you are not alone – but it is likely to be costing you dear. A study by The Cass Business School, commissioned by Barclays Wealth, has found that timing decisions by private investors since 1992 have cost them an average of 1.2 percentage points a year because they have chased performance.
Andrew Clare, professor of asset management at the school, says: "A buy and hold strategy would have turned an initial investment of £100 into £311; however, because of the poor market-timing abilities of the average private investor, the typical investment would only be worth £255. The difference of £56 arises because people tend to invest more after periods of strong market performance and withdraw it following periods of weak performance."
Tony Lanser, director, Barclays Wealth added: “Private investors have long been chasing returns by attempting to time the market but our research proves that this hasn’t always delivered."
The study backs up the long-held notion that people have a knack of mistiming their investments. Take gold, for example. Nobody wanted to touch it when it languished around the $265 an ounce mark 17 years ago, but as soon as it broke the $600 mark in 2006, investors began to climb aboard – and they still are climbing, as the price hurtles towards $1,500.
On the other hand, thousands of investors piled into technology funds at the beginning of 2000 after a long period of soaring returns. The bubble burst and technology values fell sharply. More recently, as the Telegraph's Your Money section has revealed, many investors ditched their equity holdings when the stock market dropped sharply in early 2009, and have missed out on its subsequent recovery.
Andrew Baker, chief operating officer at Skipton Financial Services, says: "No one truly knows what will be the next year's top performing fund, and anyone whose financial adviser tells them that they have a crystal ball and can predict the future is being led down the garden path.
"The danger of timing the market is that investors are invariably waiting for the markets to move and then jump on the bandwagon, thus missing out much of the growth they would have had by already being invested. Trying to second guess the markets is a fool's game. The most reliable strategy is to spend time in the market, rather than try and time the market, and to diversify your portfolio."
Indeed, there is the well-trodden argument that "it's the time in the market, not out of it, that counts''. According to Fidelity, if you had invested £1,000 five years ago in the FTSE All-Share, it would be worth £1,316 today.
However, if you had missed the best 10 days of the FTSE performance your sum would be worth just £718; and if you had missed the best 30 days you would be left with just £372. Fund management groups say it is important that investors stay invested for the long term and do not attempt to dip in and out in the hope of avoiding any lows.
The "time in the market" argument makes sense, but it can seem flippant when it comes to the prospect of losing your hard-earned cash, and given the global outlook, a degree of pessimism is understandable.
But you do not have to invest a lump sum and test your powers of buying at the right time. There is another option that is overlooked by most investors: the regular savings plan.
Saving smaller amounts of money on a regular basis reduces the risk of losing a hefty chunk of your savings if share prices take a steep dive. Of course, the opposite is true, too, and you will not make sharp gains if markets shoot up quickly.
For example, if you had put a lump sum of £9,000 in the average UK All Companies fund three years ago, you would be sitting on a fund worth £9,130.43 today. If, on the other hand, you had drip-fed £250 a month over the same period (a total outlay of £9,000) into the same fund, you would be in the money, with its value now at £11,138.94. This is because investors benefit from pound cost averaging – basically, you are buying more shares for your buck as the market falls.
So is it better being a lone wolf investor? Certainly some of the greatest investors have gone against the grain and been handsomely rewarded. John Maynard Keynes is perhaps the most famous contrarian investor of them all. It is worth remembering what he says in the aftermath of the Great Depression in 1937. "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind.''
One of the most unfashionable areas, and therefore potentially a winner, is Europe in light of the debt crisis, first with Greece and now with Ireland. Yet these two countries, and Portugal and Spain which also have problems, account for a small proportion of Europe in investing terms.
"Despite a perception of sluggish growth and an inefficient corporate sector, European companies have been transforming themselves over the past two decades, helping drive consistent outperformance from European stock markets," says Stephen Macklow-Smith, portfolio manager at JP Morgan. "Worries about deflation and sovereign debt defaults all appear overblown. Instead, the outlook for European equities appears attractive."
Adrian Lowcock, at Bestinvest, says there are opportunities in Europe, but warned investors that it could be volatile. He recommends Ignis Argonaut European Income or Neptune European Opportunities.
Contrarian investing is certainly not for the faint-hearted, especially when you are putting your cash on the line. It is probably why investors always plump for a fund or stock that has risen the most. Robert Burdett, at Thames River, says: "Consider phasing (drip-feeding), as it also works well in volatile conditions. Focus on the long term and have the courage to buy more into any dips in the markets."
Mark Dampier, at Hargreaves Lansdown, admits it is not easy to be a lone wolf investor. "In truth it's always difficult to go against the crowd. It probably needs to feel intensely uncomfortable for an investment to be 'right', and it may need a lot of patience. Unfashionable areas are Japan, Europe and UK smaller companies."
Mr Dampier put some of his own money in Japan (a perennial unfashionable area) early this year and admits that his contrarian bet has yet to pay off. But he says investors should consider Jupiter Absolute Return, managed by the highly regarded Philip Gibbs, which has had a poor year; and PSigma Equity Income, managed by the experienced Bill Mott, which is full of unfashionable stocks such as telecoms and pharmaceuticals.
"Everyone is buying mining and commodities and many fund managers, through no fault of their own, have been left behind," says Mr Dampier. "There is nothing wrong with investing in the areas that have been performing well. The key is to get off in time."
http://www.telegraph.co.uk/finance/personalfinance/investing/8152770/Dare-to-be-a-lone-wolf-investor.html
Investors are losing out by chasing performance, according to a new study.
By Paul Farrow 11:27AM GMT 23 Nov 2010
Have you invested in a fund after learning of its stellar gains and thought, "I want a piece of the action"? If so, you are not alone – but it is likely to be costing you dear. A study by The Cass Business School, commissioned by Barclays Wealth, has found that timing decisions by private investors since 1992 have cost them an average of 1.2 percentage points a year because they have chased performance.
Andrew Clare, professor of asset management at the school, says: "A buy and hold strategy would have turned an initial investment of £100 into £311; however, because of the poor market-timing abilities of the average private investor, the typical investment would only be worth £255. The difference of £56 arises because people tend to invest more after periods of strong market performance and withdraw it following periods of weak performance."
Tony Lanser, director, Barclays Wealth added: “Private investors have long been chasing returns by attempting to time the market but our research proves that this hasn’t always delivered."
The study backs up the long-held notion that people have a knack of mistiming their investments. Take gold, for example. Nobody wanted to touch it when it languished around the $265 an ounce mark 17 years ago, but as soon as it broke the $600 mark in 2006, investors began to climb aboard – and they still are climbing, as the price hurtles towards $1,500.
On the other hand, thousands of investors piled into technology funds at the beginning of 2000 after a long period of soaring returns. The bubble burst and technology values fell sharply. More recently, as the Telegraph's Your Money section has revealed, many investors ditched their equity holdings when the stock market dropped sharply in early 2009, and have missed out on its subsequent recovery.
Andrew Baker, chief operating officer at Skipton Financial Services, says: "No one truly knows what will be the next year's top performing fund, and anyone whose financial adviser tells them that they have a crystal ball and can predict the future is being led down the garden path.
"The danger of timing the market is that investors are invariably waiting for the markets to move and then jump on the bandwagon, thus missing out much of the growth they would have had by already being invested. Trying to second guess the markets is a fool's game. The most reliable strategy is to spend time in the market, rather than try and time the market, and to diversify your portfolio."
Indeed, there is the well-trodden argument that "it's the time in the market, not out of it, that counts''. According to Fidelity, if you had invested £1,000 five years ago in the FTSE All-Share, it would be worth £1,316 today.
However, if you had missed the best 10 days of the FTSE performance your sum would be worth just £718; and if you had missed the best 30 days you would be left with just £372. Fund management groups say it is important that investors stay invested for the long term and do not attempt to dip in and out in the hope of avoiding any lows.
The "time in the market" argument makes sense, but it can seem flippant when it comes to the prospect of losing your hard-earned cash, and given the global outlook, a degree of pessimism is understandable.
But you do not have to invest a lump sum and test your powers of buying at the right time. There is another option that is overlooked by most investors: the regular savings plan.
Saving smaller amounts of money on a regular basis reduces the risk of losing a hefty chunk of your savings if share prices take a steep dive. Of course, the opposite is true, too, and you will not make sharp gains if markets shoot up quickly.
For example, if you had put a lump sum of £9,000 in the average UK All Companies fund three years ago, you would be sitting on a fund worth £9,130.43 today. If, on the other hand, you had drip-fed £250 a month over the same period (a total outlay of £9,000) into the same fund, you would be in the money, with its value now at £11,138.94. This is because investors benefit from pound cost averaging – basically, you are buying more shares for your buck as the market falls.
So is it better being a lone wolf investor? Certainly some of the greatest investors have gone against the grain and been handsomely rewarded. John Maynard Keynes is perhaps the most famous contrarian investor of them all. It is worth remembering what he says in the aftermath of the Great Depression in 1937. "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind.''
One of the most unfashionable areas, and therefore potentially a winner, is Europe in light of the debt crisis, first with Greece and now with Ireland. Yet these two countries, and Portugal and Spain which also have problems, account for a small proportion of Europe in investing terms.
"Despite a perception of sluggish growth and an inefficient corporate sector, European companies have been transforming themselves over the past two decades, helping drive consistent outperformance from European stock markets," says Stephen Macklow-Smith, portfolio manager at JP Morgan. "Worries about deflation and sovereign debt defaults all appear overblown. Instead, the outlook for European equities appears attractive."
Adrian Lowcock, at Bestinvest, says there are opportunities in Europe, but warned investors that it could be volatile. He recommends Ignis Argonaut European Income or Neptune European Opportunities.
Contrarian investing is certainly not for the faint-hearted, especially when you are putting your cash on the line. It is probably why investors always plump for a fund or stock that has risen the most. Robert Burdett, at Thames River, says: "Consider phasing (drip-feeding), as it also works well in volatile conditions. Focus on the long term and have the courage to buy more into any dips in the markets."
Mark Dampier, at Hargreaves Lansdown, admits it is not easy to be a lone wolf investor. "In truth it's always difficult to go against the crowd. It probably needs to feel intensely uncomfortable for an investment to be 'right', and it may need a lot of patience. Unfashionable areas are Japan, Europe and UK smaller companies."
Mr Dampier put some of his own money in Japan (a perennial unfashionable area) early this year and admits that his contrarian bet has yet to pay off. But he says investors should consider Jupiter Absolute Return, managed by the highly regarded Philip Gibbs, which has had a poor year; and PSigma Equity Income, managed by the experienced Bill Mott, which is full of unfashionable stocks such as telecoms and pharmaceuticals.
"Everyone is buying mining and commodities and many fund managers, through no fault of their own, have been left behind," says Mr Dampier. "There is nothing wrong with investing in the areas that have been performing well. The key is to get off in time."
http://www.telegraph.co.uk/finance/personalfinance/investing/8152770/Dare-to-be-a-lone-wolf-investor.html
Tuesday, 24 August 2010
Big investors moving away from stocks into gold and bonds
Published: Tuesday August 24, 2010 MYT 9:05:00 AM
Updated: Tuesday August 24, 2010 MYT 9:13:21 AM
Big investors moving away from stocks into gold and bonds
NEW YORK: The smart money has moved away from stocks. So is the era of stock investing over?
It's too early to tell, but one thing is certain: "Money goes where it is treated best, and that hasn't been in stocks," says Wade Slome, who advises high net-worth investors and runs a hedge fund at his firm, Sidoxia Capital Management in Newport Beach, California.
The overall stock market is down over the past decade, while the price of gold has more than quadrupled and corporate bond returns have doubled. Couple that with the slow economy, and hedge fund managers and institutional investors continue to shift money away from stocks to investments they think will be safer.
An estimated $170 billion has been put in bond funds this year, while $35 billion has been pulled from stock funds, according to the Investment Company Institute, a trade group for the mutual fund industry.
So much for buy and hold.
Analysts at Bespoke Investment Group say we're in a "drive-by market." Their take: Stock investors aren't anticipating or analyzing anything. They just react to the news of the day and then move on to the next thing.
Three months ago, the survival of European banks and economies was front and center. Now, it's barely mentioned. Same goes for the "flash crash" in May. News of strong corporate earnings one day can drive the market sharply higher, but a weak earnings report the next can send prices plunging.
"Investors look at what is in front of them at that minute, and that's it," says Paul Hickey, one of the founders of the investment research firm.
The volatility begets more volatility, which further unnerves investors who have been punished by losses over the last decade. The total return, including dividend, for the benchmark Standard & Poor's 500 index is down about 11 percent since August 2000, according to Bespoke.
That means an investor who put in $10,000 in an S&P index fund 10 years ago and held it now has less than $9,000 to show for it.
Billionaire investor George Soros is one of those who bolted out of stocks in the second quarter. His Soros Fund Management reduced its stock holdings by about 40 percent to $5.1 billion from April through June, according to a quarterly report filed Aug. 17 with U.S. securities regulators. The fund sold 93 percent of its stake in Pfizer and 98 percent of its stake in Wal-Mart during the quarter.
The fund's biggest holding is an exchange-traded fund in gold-related stocks. It represents 13 percent of its stock portfolio. The quarterly report does not detail the fund's holdings outside of stocks, and the fund declined to comment on its investments.
Other big-name investors with large positions in gold ETFs include John Paulson, who was made famous for his successful bet that the subprime mortgage market would blow up.
They are sticking with gold even though prices for the precious metal are up 9 percent this year to more than $1,200 an ounce. That's four times the $300 price of an ounce of gold in 2000.
There has been an equally bullish move into government and corporate bonds. The Federal Reserve has pushed down interest rates to almost zero to stimulate the economy. That has spurred a rally in Treasury bonds and notes. The benchmark 10-year Treasury yield is down to 2.6 percent, its lowest level since the height of the financial crisis in 2009. Prices and yields move in the opposite direction.
Lower rates should help companies because they make it cheaper to borrow money and allow them to refinance their existing debt. Corporate profits then go up, leaving more money to spend on expansion or workers.
That's why lower rates should help boost stocks, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But we are not seeing that at all right now."
Instead, investors are putting money into corporate bonds, even those that offer little guaranteed return. IBM was able to raise $1.5 billion by selling 3-year notes that pay a mere 1 percent in interest. That was only 0.30 percentage points more than the yield on comparable U.S. Treasurys.
Johnson & Johnson sold 10-year bonds this month with a 2.95 percent yield, even though it pays a dividend equal to about 3.7 percent of its stock price.
That means an investor who buys $10,000 in J&J bonds gets back $295 annually for 10 years, plus the principal. If that investor bought 166 shares of J&J stock at about $60 a share now and held it for a decade, the annual payout would be $360 a year, plus any price appreciation in the stock and increases in dividends. J&J has increased its dividend for 48 consecutive years.
Junk bonds are also attracting investors. They are being issued by companies at a record clip. Junk bonds are rated lower than other corporate debt because they have a higher probability of default. Investors are compensated for that risk with higher yields, which currently average around 9 percent.
Institutional investors like pension funds that are willing to take above-average risks to get above-average returns, says Ed Yardeni, who runs his own investment and economics consulting firm.
"Investors are fed up with stocks," Yardeni says. "But they are still diversified: Half their portfolio is in gold and half in bonds."
Of course, investing in bonds and gold aren't risk-free. Far from it. The dramatic rallies in both have some on Wall Street saying that bonds and gold could be nearing a bubble that's about to pop.
By taking those positions, investors are hedging their bets about what's to come with the economy. Gold is considered a protector against inflation, and bonds are good to hold in times of deflation.
As for stocks, they're getting the short shrift they deserve. - AP
http://biz.thestar.com.my/news/story.asp?file=/2010/8/24/business/20100824091246&sec=business
Updated: Tuesday August 24, 2010 MYT 9:13:21 AM
Big investors moving away from stocks into gold and bonds
NEW YORK: The smart money has moved away from stocks. So is the era of stock investing over?
It's too early to tell, but one thing is certain: "Money goes where it is treated best, and that hasn't been in stocks," says Wade Slome, who advises high net-worth investors and runs a hedge fund at his firm, Sidoxia Capital Management in Newport Beach, California.
The overall stock market is down over the past decade, while the price of gold has more than quadrupled and corporate bond returns have doubled. Couple that with the slow economy, and hedge fund managers and institutional investors continue to shift money away from stocks to investments they think will be safer.
An estimated $170 billion has been put in bond funds this year, while $35 billion has been pulled from stock funds, according to the Investment Company Institute, a trade group for the mutual fund industry.
So much for buy and hold.
Analysts at Bespoke Investment Group say we're in a "drive-by market." Their take: Stock investors aren't anticipating or analyzing anything. They just react to the news of the day and then move on to the next thing.
Three months ago, the survival of European banks and economies was front and center. Now, it's barely mentioned. Same goes for the "flash crash" in May. News of strong corporate earnings one day can drive the market sharply higher, but a weak earnings report the next can send prices plunging.
"Investors look at what is in front of them at that minute, and that's it," says Paul Hickey, one of the founders of the investment research firm.
The volatility begets more volatility, which further unnerves investors who have been punished by losses over the last decade. The total return, including dividend, for the benchmark Standard & Poor's 500 index is down about 11 percent since August 2000, according to Bespoke.
That means an investor who put in $10,000 in an S&P index fund 10 years ago and held it now has less than $9,000 to show for it.
Billionaire investor George Soros is one of those who bolted out of stocks in the second quarter. His Soros Fund Management reduced its stock holdings by about 40 percent to $5.1 billion from April through June, according to a quarterly report filed Aug. 17 with U.S. securities regulators. The fund sold 93 percent of its stake in Pfizer and 98 percent of its stake in Wal-Mart during the quarter.
The fund's biggest holding is an exchange-traded fund in gold-related stocks. It represents 13 percent of its stock portfolio. The quarterly report does not detail the fund's holdings outside of stocks, and the fund declined to comment on its investments.
Other big-name investors with large positions in gold ETFs include John Paulson, who was made famous for his successful bet that the subprime mortgage market would blow up.
They are sticking with gold even though prices for the precious metal are up 9 percent this year to more than $1,200 an ounce. That's four times the $300 price of an ounce of gold in 2000.
There has been an equally bullish move into government and corporate bonds. The Federal Reserve has pushed down interest rates to almost zero to stimulate the economy. That has spurred a rally in Treasury bonds and notes. The benchmark 10-year Treasury yield is down to 2.6 percent, its lowest level since the height of the financial crisis in 2009. Prices and yields move in the opposite direction.
Lower rates should help companies because they make it cheaper to borrow money and allow them to refinance their existing debt. Corporate profits then go up, leaving more money to spend on expansion or workers.
That's why lower rates should help boost stocks, says Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "But we are not seeing that at all right now."
Instead, investors are putting money into corporate bonds, even those that offer little guaranteed return. IBM was able to raise $1.5 billion by selling 3-year notes that pay a mere 1 percent in interest. That was only 0.30 percentage points more than the yield on comparable U.S. Treasurys.
Johnson & Johnson sold 10-year bonds this month with a 2.95 percent yield, even though it pays a dividend equal to about 3.7 percent of its stock price.
That means an investor who buys $10,000 in J&J bonds gets back $295 annually for 10 years, plus the principal. If that investor bought 166 shares of J&J stock at about $60 a share now and held it for a decade, the annual payout would be $360 a year, plus any price appreciation in the stock and increases in dividends. J&J has increased its dividend for 48 consecutive years.
Junk bonds are also attracting investors. They are being issued by companies at a record clip. Junk bonds are rated lower than other corporate debt because they have a higher probability of default. Investors are compensated for that risk with higher yields, which currently average around 9 percent.
Institutional investors like pension funds that are willing to take above-average risks to get above-average returns, says Ed Yardeni, who runs his own investment and economics consulting firm.
"Investors are fed up with stocks," Yardeni says. "But they are still diversified: Half their portfolio is in gold and half in bonds."
Of course, investing in bonds and gold aren't risk-free. Far from it. The dramatic rallies in both have some on Wall Street saying that bonds and gold could be nearing a bubble that's about to pop.
By taking those positions, investors are hedging their bets about what's to come with the economy. Gold is considered a protector against inflation, and bonds are good to hold in times of deflation.
As for stocks, they're getting the short shrift they deserve. - AP
http://biz.thestar.com.my/news/story.asp?file=/2010/8/24/business/20100824091246&sec=business
Wednesday, 21 July 2010
Saturday, 17 July 2010
Tuesday, 13 July 2010
Understand Your Risk Capacity and Risk Tolerance
You must stay invested in the securities markets to earn market risk premiums
The securities markets pay risk premiums. You have to have your money invested and at risk to be paid a risk premium.
Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific finance studies demonstrate the both amateurs and professionals are lousy at market timing.
Historically, U.S. securities markets have paid substantial risk-adjusted returns or risk premiums to investors. While risk premiums have been substantial, they have occurred irregularly. There have been intervening periods of losses, some of which were substantial. (See: How stable have common stock equity risk premiums been over time?)
To earn market risk premiums, your assets must be invested and exposed to potential risk or loss. The more risk you can tolerate, then the higher your potential return and perhaps the rougher the investment road you may travel. Those who have better emotional tolerance for asset volatility can more easily weather market sell-offs.
Practical considerations will also affect your tolerance of investment risk.
In difficult times, whether you need to liquidate risky assets at depressed prices will depend on your expenses and on your other other holdings of less risky, salable assets. Paying necessary living expenses and taxes are good reasons to withdraw funds. Trying to time the markets for a better return is not a good reason.
If you do not need to take out money during a market retreat and recovery cycle, then risk tolerance is solely emotional. For a risk tolerant investor with stable earned income, the recent bubble crash was just a few years of unpleasantness, if he or she was fully diversified and, therefore, not heavily loaded with technology and communications equities. The same, however, could not be said for those who were poorly diversified and also found themselves to be highly risk averse, when risk actually happened. This is especially true, if job loss forced the liquidation of assets at depressed values.
To some degree, all sane individual investors are averse to risk, so risk tolerance is a relative rather than absolute issue.
Therefore, you need to judge your preference or tolerance for risk relative to other investors. While very few people like investment risk, those who can tolerate it better are those who will be less uncomfortable when risk happens from time to time and market values decline by a little or a lot. Tolerating the potential for loss is the cost that investors occasionally pay so that they are always at the table, when the markets deliver their positive rewards.
The vast bulk of individual investors’ publicly traded investment assets are held in the primary cash, fixed income, and equity financial asset classesin the form of individual securities or funds. Your relative investment risk tolerance should influence how your assets are allocated among these primary financial asset classes. If your actual asset allocation is more risky than your risk tolerance, you may not be able to handle the downturns. You might panic, when you should stand firm. If your asset allocation is less risky than your risk tolerance, then you are likely to need to spend less and save at a higher rate to reach your goals.
Nothing is certain about this process, and that is the nature of investment risk. However, the scientific investment literature is relatively clear on certain points. Amateur and professional investors are just not good at timing changes in the markets. Active strategies that attempt to time market turns have under-performed continuous investment strategies. Consistently and profitably calling serial market turns correctly has been a skill beyond mere mortals and certainly beyond the skill of even the most proud of professional and individual investors.
It is better to buy into the asset markets in proportion to your preferred asset allocation and risk tolerance and to stay in the securities markets through thick and thin.
Trying to sit on the sidelines and jump in when things seem safe simply does not work. When things seem safer, they also seem safer to others. In this situation, securities prices will have already reflected this confidence. Most of the "upside juice" or risk premium will already be reflected in current asset prices and only current securities holders will have been paid. (See: Introduction to investment valuation and securities risk)
The converse of trying to jump out to avoid the downturns also does not work. Real-time securities markets are auctions about the expected value of future securities returns. Particularly toward the downside, markets can react extremely rapidly. Getting out in time does not work, because it is usually too late when you realize you should have sold. Worse, however, you might jump out too early and be absent from the table when the market moves upward. Staying in the markets just tends to work better.
If you are more highly risk averse, it is more appropriate for you to select an asset allocation that reflects your relatively higher risk aversion.
You would hold a relatively small portion of your assets in the more risky equity asset class. Therefore, you might be more comfortable and more able and likely to keep your smaller equity allocation invested at all times. Having a smaller, but sustained exposure to equity assets tends to work much better for the more risk averse investor, compared to jumping in and out of the equity markets in larger proportions.
If you stay out of the markets due to such fears, then you are likely to need to save far more to reach your goals. Over-cautiousness is not a free ride. There is never a safe time to be in the markets, because investing is always inherently risky. There is never a safe time to be out of the markets, because you cannot earn investment risk premiums on the cash under your mattress. (See: VeriPlan helps your to compare investment risk-return tradeoffs)
Finally, you should periodically rebalance you assets back toward your planned asset allocation proportions.
To minimize the negative impacts of investment transactions costs and taxes, you should rebalance infrequently and in a planned manner that anticipates deposit and withdrawal transactions that you would need to do anyway for other reasons.
If you want to understand your personal asset allocation and risk-return tradeoffs over your lifetime, VeriPlan provides powerful, automated "what-if" planning facilities. You can rapidly develop and analyze a range of fully personalized scenarios to see whether your asset allocation strategy would achieve your objectives with a level of risk that is acceptable to you. VeriPlan provides five adjustable and fully automated mechanisms to determine your preferred lifecycle asset allocation. VeriPlan gives you full control over rates of asset returns and asset return variability, and it automatically rebalances your assets annually. It even projects the annual expense coverage by your safer cash and bond assets throughout your lifecycle.
___________________________________________________________________
http://www.theskilledinvestor.com/ss.item.174/you-must-stay-invested-in-the-securities-markets-to-earn-market-risk-premiums.html
The securities markets pay risk premiums. You have to have your money invested and at risk to be paid a risk premium.
Attempting to avoid risk or losses by jumping in and out to "time the markets" does not work. Scientific finance studies demonstrate the both amateurs and professionals are lousy at market timing.
Historically, U.S. securities markets have paid substantial risk-adjusted returns or risk premiums to investors. While risk premiums have been substantial, they have occurred irregularly. There have been intervening periods of losses, some of which were substantial. (See: How stable have common stock equity risk premiums been over time?)
To earn market risk premiums, your assets must be invested and exposed to potential risk or loss. The more risk you can tolerate, then the higher your potential return and perhaps the rougher the investment road you may travel. Those who have better emotional tolerance for asset volatility can more easily weather market sell-offs.
Practical considerations will also affect your tolerance of investment risk.
In difficult times, whether you need to liquidate risky assets at depressed prices will depend on your expenses and on your other other holdings of less risky, salable assets. Paying necessary living expenses and taxes are good reasons to withdraw funds. Trying to time the markets for a better return is not a good reason.
If you do not need to take out money during a market retreat and recovery cycle, then risk tolerance is solely emotional. For a risk tolerant investor with stable earned income, the recent bubble crash was just a few years of unpleasantness, if he or she was fully diversified and, therefore, not heavily loaded with technology and communications equities. The same, however, could not be said for those who were poorly diversified and also found themselves to be highly risk averse, when risk actually happened. This is especially true, if job loss forced the liquidation of assets at depressed values.
To some degree, all sane individual investors are averse to risk, so risk tolerance is a relative rather than absolute issue.
Therefore, you need to judge your preference or tolerance for risk relative to other investors. While very few people like investment risk, those who can tolerate it better are those who will be less uncomfortable when risk happens from time to time and market values decline by a little or a lot. Tolerating the potential for loss is the cost that investors occasionally pay so that they are always at the table, when the markets deliver their positive rewards.
The vast bulk of individual investors’ publicly traded investment assets are held in the primary cash, fixed income, and equity financial asset classesin the form of individual securities or funds. Your relative investment risk tolerance should influence how your assets are allocated among these primary financial asset classes. If your actual asset allocation is more risky than your risk tolerance, you may not be able to handle the downturns. You might panic, when you should stand firm. If your asset allocation is less risky than your risk tolerance, then you are likely to need to spend less and save at a higher rate to reach your goals.
Nothing is certain about this process, and that is the nature of investment risk. However, the scientific investment literature is relatively clear on certain points. Amateur and professional investors are just not good at timing changes in the markets. Active strategies that attempt to time market turns have under-performed continuous investment strategies. Consistently and profitably calling serial market turns correctly has been a skill beyond mere mortals and certainly beyond the skill of even the most proud of professional and individual investors.
It is better to buy into the asset markets in proportion to your preferred asset allocation and risk tolerance and to stay in the securities markets through thick and thin.
Trying to sit on the sidelines and jump in when things seem safe simply does not work. When things seem safer, they also seem safer to others. In this situation, securities prices will have already reflected this confidence. Most of the "upside juice" or risk premium will already be reflected in current asset prices and only current securities holders will have been paid. (See: Introduction to investment valuation and securities risk)
The converse of trying to jump out to avoid the downturns also does not work. Real-time securities markets are auctions about the expected value of future securities returns. Particularly toward the downside, markets can react extremely rapidly. Getting out in time does not work, because it is usually too late when you realize you should have sold. Worse, however, you might jump out too early and be absent from the table when the market moves upward. Staying in the markets just tends to work better.
If you are more highly risk averse, it is more appropriate for you to select an asset allocation that reflects your relatively higher risk aversion.
You would hold a relatively small portion of your assets in the more risky equity asset class. Therefore, you might be more comfortable and more able and likely to keep your smaller equity allocation invested at all times. Having a smaller, but sustained exposure to equity assets tends to work much better for the more risk averse investor, compared to jumping in and out of the equity markets in larger proportions.
If you stay out of the markets due to such fears, then you are likely to need to save far more to reach your goals. Over-cautiousness is not a free ride. There is never a safe time to be in the markets, because investing is always inherently risky. There is never a safe time to be out of the markets, because you cannot earn investment risk premiums on the cash under your mattress. (See: VeriPlan helps your to compare investment risk-return tradeoffs)
Finally, you should periodically rebalance you assets back toward your planned asset allocation proportions.
To minimize the negative impacts of investment transactions costs and taxes, you should rebalance infrequently and in a planned manner that anticipates deposit and withdrawal transactions that you would need to do anyway for other reasons.
If you want to understand your personal asset allocation and risk-return tradeoffs over your lifetime, VeriPlan provides powerful, automated "what-if" planning facilities. You can rapidly develop and analyze a range of fully personalized scenarios to see whether your asset allocation strategy would achieve your objectives with a level of risk that is acceptable to you. VeriPlan provides five adjustable and fully automated mechanisms to determine your preferred lifecycle asset allocation. VeriPlan gives you full control over rates of asset returns and asset return variability, and it automatically rebalances your assets annually. It even projects the annual expense coverage by your safer cash and bond assets throughout your lifecycle.
___________________________________________________________________
http://www.theskilledinvestor.com/ss.item.174/you-must-stay-invested-in-the-securities-markets-to-earn-market-risk-premiums.html
Wednesday, 2 June 2010
20 Questions to Focus the Hold versus Sell Decision
Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html
Monday, 22 March 2010
Buy and hold or Buy and sell: there is a difference in what you look for when you do each type of strategy
Stock Market Training Course
So, you’re ready to buy the first stock and want a stock market training course. The first step in stock trading is finding the right stock to purchase; you need to do research for this. Before you begin looking you need to decide whether you’re going to buy and hold or buy and sell. There’s a difference in what you look for when you do each type of strategy.
Buy and hold is a long-term strategy. You look for stock that gives either dividends or one that has continuous growth. Some examples of the type with dividends are bank stocks. Bank stocks usually do well during times of recession. These stocks, like other value stocks offer dividends that offer better returns than many fixed income instruments. They also offer stability in a time that the economy is not performing it’s best. If you purchase value stocks during a healthy growing economic time, you can get a bargain. Because they are so stable, often purchasers overlook these stocks in favor of stocks that are more glamorous and promise new and rapid growth, like technology stock.
If you pick stocks during a recession where the economy is low and under performing, growth stocks are usually bargains. Be sure that you know the company and the management when you select a stock. Some companies aren’t healthy or strong enough to make through bad times. If the stock you select is a retail store, shop there. See what the store interior looks like and check the number of shoppers. There are many clues that tell you a company is in trouble if you just take the time to look. Many experts that pick winners, sample the products before they buy. Remember, retail stocks and stocks with products you use daily offer that opportunity. If you like what they produce, get excellent customer service or choose their brand over another, chances are you’re not alone. This additional information is not solely the basis for astock pick but help in narrowing the playing field.
Short-term investors buy and sell, just need to look for opportunity when they select stocks. Depending on the style of short term investing you choose, your strategy also varies. The short-term investor that expects a company to increase in value over the next few months, selects stock differently than the day trader that looks for changes in the charts of the stock’s price. If you choose to do very short, day trading type of investing, you need to understand the signs that indicate a favorable purchase or closely track a multitude of stocks and find one that has a reoccurring pattern of predictable dips and rises.
It all sounds very complicated and a lot of work. It is. Most people that do short term trading tie themselves to their computer if the market is open, and spend the evening studying for the next day. That is, unless they use a service that does it for them. There are several stock picking services that analyze the charts and help you pick. Some use very scientific methods and others use a system known only by them. One of the more scientific services uses a stock-picking robot. It’s a program that studies the penny stocks, almost unheard of, and makes recommendations based on the tracking of their prices.
Once your homework is complete and you have stocks to buy, decide the price to dump it. If you do short term investing, releasing the stock is part of the program. Find a percentage that you want to earn and when the price hits that is the equivalent to that percent, sell. Also, choose a price that you sell on the bottom end. This is more difficult since you didn’t enter the market to loose money. Most people that do well in investing cut their losses at appropriate times instead of riding the stock to the grave.
Thursday, 4 March 2010
Buying and holding can be very profitabe until the facts change
Buy and Hold Isn't Extinct, But It Needs to Evolve
It can be very profitable if investors execute it with the mindset of buying and holding until the facts change.
At a recent CFA market outlook dinner, the guest speakers concurred that long-term buy and hold will under-perform in 2010 and will continue be a difficult strategy to employ in the future.
This is by no means revolutionary. Buy-and-hold naysayers emerged immediately following the financial crisis and housing bubble crash that caused disarray throughout capital markets.
But it was a shocking message coming from a panel at a CFA affair. As a candidate in the program, I am familiar with the CFA Institute’s intense focus on fundamental analysis.
On the one hand, there is some value to this proposition. Throughout the decade, technology has changed the playing field of the market and allowed short-term strategies to succeed. The ability for new news to be almost instantaneously priced into the market upon announcement can cause stock prices to fluctuate irrationally, sometimes based on just numbers or speculation alone rather than the actual analysis of a company.
Further, more frequent and intense bubbles and collapses have caused drastic market-wide swings that cause mass divergence between a company’s intrinsic value and its stock price. The 2008 global financial crisis is a solid case in point.
However, suggesting that buy and hold is dead essentially means that the fundamentals of a company are worthless. The thought of that notion is ludicrous.
(See also, Five Investing Myths Debunked)
In many cases, investors are extremists. One group believes in solely analyzing fundamentals and buys a stock to hold forever. Another group covers up the name of the company andtrades only on quantitative factors.
But extremism tends to fail. I witnessed it first-hand in the investment industry during employment at my last firm. Die-hard buy-and-hold-forever investors refused to let go of overvalued companies they believed in for the long run and snubbed macro event market movement only to eventually end up deep in the red.
Like anything, investment strategies need to change. And they need to be modernized to remain relevant. Finding great stocks to hold for a long time combined with trading on macro news and changing valuations seems more realistic than holding a stock forever.
This is precisely why Warren Buffett and his Berkshire Hathaway (BRK.A) holding company have remained so successful. As one of the greatest buy-and-hold investors of all times, Buffett’s philosophy has been studied and talked about extensively. Interestingly enough though, his strategy is widely misunderstood.
(See also, What Buffett Got Wrong)
Buffett undoubtedly focuses on fundamental values of a company and purchases stocks with a buy-and-hold mindset. He looks for companies with strong brand names, like Coca-Cola(KO), Kraft (KFT), Goldman Sachs (GS), and General Electric (GE). But he still trades on macro news and sells when investments become overvalued. In the past, he soldMcDonald's (MCD) and Disney (DIS) when he no longer felt they were worth his capital.
In other words, buy and hold can be a very profitable investment strategy provided investors execute it with the mindset of buying and holding until the facts change.
Purchasing a fundamentally strong company when its price is attractive works. Loading up on more of that stock if the price slips on short-term news works. When either a company becomes overvalued or its business model begins to negatively change, selling works.
Exact market timing isn’t necessary. The strategy is simply picking solid stocks and using common sense.
The bottom line is that the buy-and-hold portfolio is not extinct. It just needs to evolve.
http://www.minyanville.com/businessmarkets/articles/buy-hold-sell-strategies-warren-buffett/3/3/2010/id/27112
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.
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
Friday, 26 June 2009
The Buy-and-Hold Strategy Is Going, Going, Gone ...
The Buy-and-Hold Strategy Is Going, Going, Gone ...
By Peter Khanahmadi
June 25, 2009
It's been interesting to observe the zeal with which people have taken part in the Fool's debate about buy-and-hold investing. There have been many arguments in favor of buy and hold, some against, and some in between.
My view is that the buy-and-hold strategy is fading fast, right before our eyes. The days of holding onto a stock for 20 or 30 years and forgetting about it until retirement are over.
Thanks to technological advancements that enable far greater competition, as well as global economic uncertainty, the buy-and-hold approach just isn't effective in today's market.
For example, consider a company like Sun Microsystems (Nasdaq: JAVA), which was riding high during the tech boom of the late 1990s. Investors at the time felt Sun would be a long-term buy given its significant tailwinds -- it was providing software and Internet equipment for the ever-growing World Wide Web.
But the tech bust, along with furious competition from IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), dismantled Sun and its stock price. Although this is just one admittedly extreme example (Sun is down 85% over the past decade), it serves to remind us how critical it is to actively monitor stock investments to gauge when to make appropriate decisions to sell.
Several comments from our Foolish members support the view that buy and hold is rapidly fading. Here are a few interesting ones:
"Holding anything for a long period of time has never been a good idea, and even less so today. In our economic system, money moves rapidly and constantly, so while you're sitting on your money for a long period of time, a lot of people are using/moving your money and making big profits, and in the end you'll get a few scraps back after sitting on it for ten years. If a 8-12% return on your investment after several years seems good to you, then fine, but in reality it's a very paltry sum compared to what other made with your money in the same time period. And as many of you know, after ten years you may be even be down, not up." -- IMHarvey
"I vote YES. When I became a cognizant being in the 60's and 70's, BAH had a rather concrete meaning. You bought a stalwart American company, an engine of capitalism, like AT&T or GM or a utility. You held it forever; the rest of your life; until you die. When you retire, you harvest your crop.TMF seems to quote 10 years as a horizon, but I wonder if many journalists and everyday investors are thinking of 5 years; I know I do." -- jerryguru69
"In my opinion, the buy and hold days are over. That does not mean you should become a day trader, but modern technology is changing so fast that the probability that any one company is going to be the top dog forever is very low. I now set stop losses on every stock I buy and if it drops significantly it automatically sells. If it turns out I should have kept the stock, I can buy it back again for $7 on many on line sites. I will never again let my portfolio drop significantly based on predictions from so called stock experts, that on reality don't know any more than I do." -- harry1n
As with all great debates, both sides must be heard. Although I strongly hold the view that buy and hold is fading fast, some members provided evidence to the contrary:
"Coca-Cola (NYSE: KO), a blue-chip stock anyone with a 5th grade education can understand, is up over 9,000% over the last 35 years, yet more than 97% of the population missed the run. As recently as March 2009, this simple, yet very powerful stock was trading at a very reasonable 14 times earnings, yielding 4% in dividend income. This is the same PRICE Warren Buffett paid for it in 1989! (adjusted to 4 bucks a share, post splits). Yet, there were with NO takers!!!
Truth be told, most people do NOT have the stomach, nor the patience for the stock market. You need both.
If you are reading this post, are less than 45 years old, and do not smoke, then you are likely going to live for another 30-40 years. If history has taught us anything, over that kind of time horizon, a 50-60,000 handle on the DJIA is simply inevitable.
Thus, the one thing all LONG TERM equity investors have in common is FAITH.
For without faith, I would have tossed my Dow Chemical, General Electric, Harley Davidson (NYSE: HOG), McDonald's (NYSE: MCD), and Pfizer (NYSE: PFE) stock overboard a long time ago." -- daveandrae
Wherever you fall in the debate, you cannot ignore the fact that today's market is filled with volatility and uncertainty. Knowing this, investors must stay on top of their portfolios and actively track, follow, and yes, even manage, their holdings.
What's your take? Is buy and hold quickly fading or not? Leave us a comment below and let us know!
For all our buy-and-hold coverage:
Long-Term Investing Doesn't Work
Blog: The Life and Subsequent Death of Buy-and-Hold Investing
Buy and Hold Isn't Dead. It's Just Wounded.
The Most Certain Way to Wealth in Our Uncertain World?
http://www.fool.com/investing/general/2009/06/25/the-buy-and-hold-strategy-is-going-going-gone.aspx
By Peter Khanahmadi
June 25, 2009
It's been interesting to observe the zeal with which people have taken part in the Fool's debate about buy-and-hold investing. There have been many arguments in favor of buy and hold, some against, and some in between.
My view is that the buy-and-hold strategy is fading fast, right before our eyes. The days of holding onto a stock for 20 or 30 years and forgetting about it until retirement are over.
Thanks to technological advancements that enable far greater competition, as well as global economic uncertainty, the buy-and-hold approach just isn't effective in today's market.
For example, consider a company like Sun Microsystems (Nasdaq: JAVA), which was riding high during the tech boom of the late 1990s. Investors at the time felt Sun would be a long-term buy given its significant tailwinds -- it was providing software and Internet equipment for the ever-growing World Wide Web.
But the tech bust, along with furious competition from IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ), dismantled Sun and its stock price. Although this is just one admittedly extreme example (Sun is down 85% over the past decade), it serves to remind us how critical it is to actively monitor stock investments to gauge when to make appropriate decisions to sell.
Several comments from our Foolish members support the view that buy and hold is rapidly fading. Here are a few interesting ones:
"Holding anything for a long period of time has never been a good idea, and even less so today. In our economic system, money moves rapidly and constantly, so while you're sitting on your money for a long period of time, a lot of people are using/moving your money and making big profits, and in the end you'll get a few scraps back after sitting on it for ten years. If a 8-12% return on your investment after several years seems good to you, then fine, but in reality it's a very paltry sum compared to what other made with your money in the same time period. And as many of you know, after ten years you may be even be down, not up." -- IMHarvey
"I vote YES. When I became a cognizant being in the 60's and 70's, BAH had a rather concrete meaning. You bought a stalwart American company, an engine of capitalism, like AT&T or GM or a utility. You held it forever; the rest of your life; until you die. When you retire, you harvest your crop.TMF seems to quote 10 years as a horizon, but I wonder if many journalists and everyday investors are thinking of 5 years; I know I do." -- jerryguru69
"In my opinion, the buy and hold days are over. That does not mean you should become a day trader, but modern technology is changing so fast that the probability that any one company is going to be the top dog forever is very low. I now set stop losses on every stock I buy and if it drops significantly it automatically sells. If it turns out I should have kept the stock, I can buy it back again for $7 on many on line sites. I will never again let my portfolio drop significantly based on predictions from so called stock experts, that on reality don't know any more than I do." -- harry1n
As with all great debates, both sides must be heard. Although I strongly hold the view that buy and hold is fading fast, some members provided evidence to the contrary:
"Coca-Cola (NYSE: KO), a blue-chip stock anyone with a 5th grade education can understand, is up over 9,000% over the last 35 years, yet more than 97% of the population missed the run. As recently as March 2009, this simple, yet very powerful stock was trading at a very reasonable 14 times earnings, yielding 4% in dividend income. This is the same PRICE Warren Buffett paid for it in 1989! (adjusted to 4 bucks a share, post splits). Yet, there were with NO takers!!!
Truth be told, most people do NOT have the stomach, nor the patience for the stock market. You need both.
If you are reading this post, are less than 45 years old, and do not smoke, then you are likely going to live for another 30-40 years. If history has taught us anything, over that kind of time horizon, a 50-60,000 handle on the DJIA is simply inevitable.
Thus, the one thing all LONG TERM equity investors have in common is FAITH.
For without faith, I would have tossed my Dow Chemical, General Electric, Harley Davidson (NYSE: HOG), McDonald's (NYSE: MCD), and Pfizer (NYSE: PFE) stock overboard a long time ago." -- daveandrae
Wherever you fall in the debate, you cannot ignore the fact that today's market is filled with volatility and uncertainty. Knowing this, investors must stay on top of their portfolios and actively track, follow, and yes, even manage, their holdings.
What's your take? Is buy and hold quickly fading or not? Leave us a comment below and let us know!
For all our buy-and-hold coverage:
Long-Term Investing Doesn't Work
Blog: The Life and Subsequent Death of Buy-and-Hold Investing
Buy and Hold Isn't Dead. It's Just Wounded.
The Most Certain Way to Wealth in Our Uncertain World?
http://www.fool.com/investing/general/2009/06/25/the-buy-and-hold-strategy-is-going-going-gone.aspx
Subscribe to:
Posts (Atom)