Buy and Hold Investing Works

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The tech boom of the late 1990s and very early 2000s made day trading a household term. Before the days of cheap stock trades and even cheaper real-time information, buy and hold was the norm. For regular folks, buying and selling stocks during the day was both expensive and fruitless because you didn’t know the exact price (you just called your broker to fill an order) and you wouldn’t until the next day, when it was printed in the newspaper. The internet changed all that.

However, buying and holding is still the smartest strategy, despite lower transaction costs, because the vast majority of people are terrible at picking stocks. We don’t do enough research, we aren’t as knowledgeable about a company as we should (it takes more than reading their income statement and balance sheet – a lot more), and we aren’t able to research as much companies as we should (we should know the company, it’s competitors, it’s suppliers, it’s distributors, it’s regulatory environment, etc.). We have day jobs!

I came to this realization because I’ve been reading Crossing Wall Street for at least a year. It’s written by Eddy Elfenbein, a self-proclaimed stock market addict and named by CNN/Money as the best buy and hold blogger. His “thing” is his annual Buy List of stocks that he changes once a year and frequently puts up against the S&P500. He’s beaten the S&P500 each of the last four years and his site, and his list, is completely free (so no “fee” so to speak).

All that is well and good but when you read his posts, and his email newsletter, you’ll probably realize how little you know about the companies you own. He has an uncanny way of predicting a company’s earning’s results and is rarely surprised (if there is every a surprise, it’s usually with annual projections or some other surprise), which is a sign that I don’t know enough!

One example, his buy list, doesn’t necessarily “prove” that Buy and Hold investing works but it certainly doesn’t hurt when you have a well informed person making up that list. (I don’t have anything patterned about the Buy List, I do own a few companies on it, but I do like reading his posts – and he responds to email)

{ 4 comments, please add your thoughts now! }

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4 Responses to “Buy and Hold Investing Works”

  1. Most people are “know-nothing” investors and are better off buying or dollar-cost averaging into an index fund….. few people have any true stock picking talent. Anyone who reads books by John Bogle, Burton Malkiel or William Bernstein can hear the case being made rather persuasively for passive, index investing. There are always carnival barkers on Wall Street trying to sign people up for a fee for stock picking advice. Best to just ignore them.

  2. Rob Bennett says:

    I don’t agree that Buy-and-Hold works, Jim. I think it would be fair to characterize me as the world’s most severe critic of Buy-and-Hold.

    The points you make are valid. My take is that you are ignoring one element of the Buy-and-Hold strategy that transforms what could be something wonderful into a Get RIch Quick scheme.

    You are focused on the “hold” part of Buy-and-Hold. Yes, that part works. What doesn’t work is the idea that it is okay to buy at any price. If you are going to hold an investment for a long time, you need to be sure that it represents a solid long-term value proposition. That’s not been so of U.S. stocks since 1996. Stocks have never performed well in the long term starting from such insanely high valuation levels.

    To be sure, there are many good and smart people who think I am off my rocker re this stuff. Perhaps they are on to something!

    I wish you the best of luck in all your future endeavors.


  3. Yieldstream says:

    Buy and hold investing works for some investors: if you have a long enough investment horizon, can tolerate significant risk and portfolio drawdowns, etc. Unfortunately many people do not fit into this category, and end up buying/selling at the worst possible time. Tactical asset allocation offers a good alternative. You don’t have to pick individual stocks, you can use ETFs or mutual funds, and the active risk management helps (to stick with the strategy in good times and bad).

  4. NateUVM says:

    But in cherry-picking 1996 you’re actually demonstrating the danger of trying to do anything BUT Buy and Hold. Sure, the valuation compared to 1996 isn’t great, but what about since 1933? Or, even late-fall 2008?

    We can come up with plenty of dates to make our own case, but the point is that, for the average investor, they aren’t going to necessarily know what the market valuation is in context. Their best bet, as opposed to trying to time when that might be, may be to invest in a broad market index fund with low fees and ride the waves (volatility matched with their investment horizon, risk tolerance, etc…).

    You make a good point that one shouldn’t just blindly “buy” on the hope that a particular investment, no matter how long it is held, will appreciate in value. But I don’t think that’s the point of this article, either.

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