Friday, November 14, 2008

Buy-and-Hold Dead? I think not.

Lee Brodie calls the death of Buy-and-Hold based on the comments of Jeff Macke (Hattip Barry)?

2008 is the year that will go down in history as the year that long term investment died as a thesis.

Jeff Macke may not be a fan, but calling the long term investment model a dead duck is absurd.

Lee suggests diversification as a solution, but diversification dilutes gains and brings you towards ETFsm, then index funds, which invariable means a buy-and-hold strategy. It's not diversification or time frame that matters, it's risk management that's key. Taking money off the table is fine and dandy if your position heads into profit, but it doesn't protect you when things go against you (and frequently as was the case for many this year). It doesn't matter if you hold for minutes, hours, days, weeks, months or years - the principle for (re)action is the same.

For starters, Buy-and-Hold is not a returnless system; stocks falling under the buy-and-hold umbrella tend to be dividend payers with a history of dividend growth; growth which can produce stellar returns relative to the initial investment. The loss of a Buy-and-Hold limb (financials) was probably viewed by the good doctors to pronounce the patient dead, but the patient is still very much alive and well.

One only has to look at certain buy-and-hold favourites like Johnson and Johnson (JNJ) to see 2008 was no better or worse than prior years and this excludes the compounding dividend return:

Buy-and-Hold is the safest way to own stock because it removes the whims of emotions; yes - many 401Ks were badly damaged this year, but would a more actively managed portfolio have performed better? Hmmmm.... those 'smart money' Hedge Funds are having a great 2008?

The Fast Money talking heads spout nonsense and fail to see the oppotunity presented to them - the ol' can't see the forest for the trees.

One only has to look at past market collapses to see the golden opportunity it provided for buyers. The key is not to put your eggs into one basket and try and time the market; it's about applying basic strategy.

[1] Finding markets and sectors deep in 'bear market' territory (>20% decline from highs)

[2] Understanding the cyclical nature of markets; 4 year bull/bear cycles (markets take longer to go up than go down so it tends to split 5/3). October 2007 was the start of the current cyclical bear market so look to October 2010 or thereabouts to signal its end.

[3] You have x capital and y time to invest (y in this case is the number of months from now to October 2010). The amount you have available each month to invest is x/y

[4] Screen for your favourite stocks or sector. I would look for stocks yielding 5% or higher as a starting point. Create a stocklist.

[5] Study a simple price chart for each stock; if they exhibit a modest uptrend or trading range then they are good 'buy' candidates (the former for sustained growth, the latter for future gains). You want to avoid stocks making parabolic moves as these 'darlings' are just fads (how many made great profits on the way up, only to give them back buying "pullbacks" on the way down?)

[6] Once your positions are filled, then you can calculate your average cost. Apply a 10-15% stop loss (adjusted quarterly) on the entire position and let the compounding begin.

[7] As long as people keep making babies (new consumers) there were always be room for buy-and-hold.

At Zignals we provide the tools to help you make better decisions.

Speaking of Buy-and-Hold, was Sell-and-no-Hold the mantra of the subprime world?

Dr. Declan Fallon, Senior Market Technician, the free stock alerts, market alerts, and stock charts website