

Buy and Hold is a Myth - steveplace
http://www.graduatedtaste.com/2008/06/24/buy-and-hold-is-a-myth/

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byrneseyeview
Idiocy.

 _Of course there is a difference with trading and investing, but there’s one
thing that the two have in common: risk management. If you’re investing for
the long haul, you still need to have stops in place and contingincies written
out._

I love the idea that stop-loss orders are somehow part of 'investing'. So
here's your scenario: you are analyzing ABC Co., which trades at $5. A careful
assessment of their assets, growth prospects, and management makes it clear to
you that the stock is probably worth $10. So you buy at $5. The next day, a
well-regarded technical analyst announces that the stock has done a pigeon-
toed triple-flopped oat-and-tree formation, and is destined to take a
Fibbonacci retracement. The stock drops to $4.00. Suddenly, your 'risk
management' system tells you that this stock, which you had purchased for
fifty cents on the dollar, is a _worse_ deal because it now trades at _forty_
cents on the dollar.

This is like getting rid of all your clothes because a clothing store had a
sale.

If you're buying because you think you're getting a good business at a fair
price, the daily quoted value only tells you whether you can buy more at a
good price, or sell some at a good price. It doesn't inform you about business
prospects, or changes in the underlying value.

Also, buy-and-hold is a myth because of one cherry-picked anecdote? Look at a
thirty-year chart of KO, PFE, MO, WMT, and, for that matter, BRK.A.

Making good investments is extremely hard. Making satisfactory investments is
not nearly so hard. But adding in a bunch of gibberish about managing risk by
selling when others panic will never help anyone.

~~~
steveplace
Geez, didn't think I'd get reamed over this (much less make the front page)

1) Stop-loss orders should be part of an investment strategy. Sometimes, with
all your analysis, you can be wrong. Do you plan to risk your entire allocated
capital if the stock goes to $0? Do you decide not to cash out in order to
find better deals? If that's part of your plan, fine. The point is _people
don't have plans when they invest_.

2) Selling a stock when it's dropped a dollar is not a good risk management
strategy. O'Neil reccomends no more than an 8% drawdown on capital for larger
stocks (a $5 stock is a different example).

3) Selling because someone else told you that the stock did a pigeon-toed
tripple-flopped oat-and-tree formation is not good risk management. Although
that is a viable pattern ;)

4) If a stock dropped and you are still convinced of its value, then average
in. Of course _this should have been part of your plan to begin with._

5) My rant was about not taking profits if a security doubles. That's dumb,
especially in allocation strategies (which I mentioned near the bottom of the
post).

6) You speak of value investing. That's a good strategy, but not the only
strategy.

7) Buy and hold is a myth because people don't look beyond that. There's no
contingency. Even Warren Buffet has contingincies (in which he just flat out
buys the company so he can fix it).

8) And this post wasn't even about stock picking (your buy and hold examples
are stocks) this was an _ETF_.

~~~
byrneseyeview
1) No. Again, why should you have an automatic system for panicking when other
people panic? If your ideal is really to be average, but slow, how will you
ever succeed?

2) Why 8%? Why not for low-price stocks? What about for stocks traded overseas
(5 Yen? 500 Yen?)? It all sounds very unscientific -- and I've read O'Neil's
books.

3) I didn't say that this involved selling then. That call caused the stock to
drop in my example. Then the drop caused the stop-loss sale.

4) Average in before or after getting stopped out?

5) Why are you viewing the price quote isolated from the business value? If
the stock is up 100% because the company is worth more, selling is not that
wise. If the company triples in value (e.g. a new patent, a competitor going
under), the 100% rise in price is not a good excuse to sell.

6) Value investing is when you try to buy something for less than it's worth.
Usually, a strategy of paying 110 cents on the dollar can't get by with the
claim that it's just another "strategy", even if the plan is to flip it to
someone else for 120 cents on the dollar. When you rely on an infinite supply
of subsequent suckers, it's very probable that you will some day be the last
sucker.

7) "Buy and hold" doesn't mean "Buy and hold forever." It means that your bias
should be towards sticking with a few good investments, rather than playing
lots of markets. In general, if A's strategy calls for one good idea a year
and B's strategy calls for ten good ideas a month, A will have devoted 100X as
much effort to his average idea (and will be paying much lower taxes!).

8) So? When you purchase shares of many businesses at once, instead of one,
are you exempt from behaving in a businesslike manner?

~~~
steveplace
1) It's not panicking. It's capital preservation.

2) 8% is an example from William O'Neil for large cap domestic stocks. That's
his number; it's up to the investor to define their own plan. Percentage moves
in lower dollar stocks are greater than higher dollar stocks. (It's easier to
go from 1 to 2 than 20 to 40).

3) Calls in Technical Analysis rarely cause the stock to drop.

4) It's all part of your plan. Your original example of getting out when a
stock drops a dollar is not a good one. If a stock you bought at 40 goes to
30, would you get out, or add more? What about 20? 5? You need to have a plan.
That was the whole point.

5) Great question. If the stock is up 100% because the company _says_ their
worth more, should you sell? My example ($BKX) is a great example because the
fundamental valuation that the banks gave us for the past 2-3 years were
misleading.

6) It is a viable strategy if it produces a positive expectancy. _That being
said,_ most people can't get an edge in trading. However, you do need to have
contingencies when investing.

7) That's the point I was trying to make! It's not buy and hold forever... but
what's your timeline, or your price point?

8) Stocks and ETF's have different risk characteristics.

When people invest (and at this point in our discussion, I'm talking about
specific stocks or focused ETFs) they are not always right. What do you do
when you aren't right? Do you blindly hold on to the stock, waiting for that
bounce? If you don't have a set risk management plan, then you will panic.

Similarly, what if you are very right and one of your picks doubles. Are you
willing to risk all of your gains in the future or are you going to _protect
profits?_

The whole _point_ was to show how risk management and capital preservation is
a necessity when investing (or any business venture). To deny that is a
serious mistake.

------
noodle
i call bullshit. for so many reasons.

if you want to maximize your profits, sure, buy low and sell high, and repeat.
this takes time to learn how to do well, though, as well as to perform the
strategy.

if you don't have time or the knowledge or the stones or the money to lose as
you learn lessons to play the market game, buy and hold index funds or solid
dividend-paying stocks.

~~~
pfedor
_this_ _takes_ _time_ _to_ _learn_ _how_ _to_ _do_ _well_

If it's possible at all. If you believe that markets are efficient, then it's
not. Even if they're not efficient, it may be impossible to exploit the
inefficiencies because of the taxes and trading costs. Buying and holding an
index of stocks historically outperforms an average actively managed fund, and
past performance of a fund is not a predictor of future performance (so it
doesn't help to buy funds that did well in the past.)

~~~
byrneseyeview
You are not taking the efficiency argument far enough: if the market is
efficient, it isn't a good use of time to do your research. But if it's not
worth anyone's time to do research, the market will no longer be efficient.

The market may be 'efficient' in the sense that people inclined to do research
have a fair tradeoff between time spent researching and the benefits thereof.
But it is incoherent for the markets to be perfectly efficient, in the sense
that investors are able to rationally appraise the value of every single
stock, but are fully incapable of appraising the value of their own time.

~~~
eru
Perhaps your weaker version of efficiency suffices. If you are not on par with
Buffett - buy index fonds.

------
tptacek
What the fuck ever. VFINX and SPY consistently beat actively managed funds.
Cherry picking a single swing and saying you could have gamed it isn't a
convincing argument.

~~~
steveplace
This example wasn't a swing. Swing timeframes are under a month. This was an
ETF doubling in 5 years and giving it back in under 1.

------
noonespecial
BS. Most people buy and hold index funds not _single stocks_! I can find tons
of examples where it would be better to "time the market". Pets.com? I can
find just as many to prove that buy and hold is exactly the right thing to do.

This assertion is totally bogus. Its not even a manipulation of statistics,
just an out of context graph in a nonsense argument. Swing and miss.

~~~
steveplace
The example was an index fund.

~~~
noonespecial
Ahh. True enough, but a narrow one to be sure, (Made up of only 24 banks and
lenders). Point remains that it was hand picked from a sector that is doing
historically bad right now in order to try to prove a dubious point.

~~~
steveplace
This is not dubious. People don't have a plan for asset allocation when
developing individual portfolios.

Like I said in the post, if you've want 5% of your assets exposed to banks,
and the etf doubles, then your exposure is now 10% of your portfolio. You
should start paring off to reduce your risk to that particular industry.

Even with broad based index funds aren't _completely_ diversified. There's no
hedging against currency, inflation, and taxes (i.e. muni bonds).

If you are to build a passive portfolio, get a friend that works in the High
Net Worth section of a broker and get the allocation sheet from them. There's
an ETF for every category.

------
quellhorst
Tell Warren Buffet that buy and hold is a myth...

------
bumbledraven
Tell it to Warren Buffet.

