Working Money magazine.  The investors' magazine.
Working-Money.com


LIST OF TOPICS





Article Archive | Search | Subscribe/Renew | Login | Free Trial | Reader Service


PRINT THIS ARTICLE

MONEY MANAGEMENT


Is Buy-And-Hold The Strategy For You?

03/01/01 03:17:41 PM PST
by RM Sidewitz, Ph.D

Buying and holding stocks may not be the best approach for everyone, especially those who are unwilling to sit back and take large losses while they wait for their stocks to climb back up.

Many investors believe that buy-and-hold is the best strategy to use for the long term when it comes to stocks. However, over a two-year period, someone who buys ABC Corp. stock at $40, sees it rise to $50, decline to $35, and then rise again, this time to $65, is not getting as good an overall return as he or she thinks (Figure 1). Why, you ask? That investor has lost the opportunity to maximize what his money can do because he has chosen to remain in the market.

FIGURE 1: LOST OPPORTUNITY. The investor may think that he or she is using the best strategy possible when using buy-and-hold for the long term. But is it really the best?


SOMETIMES THEY COME BACK

The truth is that buy-and-hold isn't the best approach for everyone. Buy-and-hold means that even when the market is falling and struggling, you sit, waiting for it to rebound to previous heights. That could take a while; it took almost a year for the stock market to return to its previous levels from the 1974 decline, 10 months to come back from the 1994 dip, but almost 24 months to regain the losses from the 1987 stock market correction. This is time that you're spending just waiting to break even.
 
Look at it another way. If your portfolio falls in value from $10,000 to $8,000 (or $1 million to $800,000, for that matter), it has dropped 20% in value. That means the market will have to rise 25% just for you to get back to where you were before. Waiting to get back to being even creates the phenomenon I refer to as the "involuntary investor."
 
The underlying premise of buy-and-hold is that it's impossible to invest in a manner that better insulates you from eventual declines, and therefore, it's in your best interest if you just remain patient. "It'll come back," buy-and-hold believers always tell you.

SOMETIMES THEY DON'T

The truth is that not all stocks rebound; some stocks simply die. Among stock favorites of earlier periods, some such as Chrysler (DCX) went through rocky times, documented in detail in the news media, but eventually triumphed, coming back from the dead.
 
But some others such as Pan Am (PAAN) do not have such a happy ending. Further, in 2000, many so-called long-term investors in Nasdaq-listed companies found the value of their shares continuing to fall as they were waiting for them to come back. Ultimately, the pain became more than they could bear and many investors sold off their holdings at huge losses.
 
That reaction is understandable; on a very subtle level, you've been told over and over again to never, ever sell! Think about it. When was the last time you heard about or read a sell recommendation from a stock brokerage research department? In fact, according to Zacks Investment Research, of the 8,000 recommendations made by analysts covering the Standard & Poor's 500 index companies in 2000, only 29 were sells. That's less than one-half of 1%!
 
How can that be? According to Zacks vice president Mitch Zacks: "It's not that they're oblivious to things getting worse [at companies]. But the way an analyst gets fired is to damage an existing investment banking relationship with a company or sour a future investment banking relationship. The way you do that as an analyst is coming out and telling people to sell a stock."
 
The unavoidable result is that there is simply no one willing to tell you to get out of the market, ever. "You'll miss the next big move if you're not in the market," you're told. You are not told that the price of waiting for the next big move is you have to sit through substantial market declines that erode your assets. That's a big price to pay.
 
A buy-and-hold strategy for stocks is an investment approach that takes power away from the long-term investor. But there is a better way, which I will explain in my next article.

R.M. Sidewitz is president, chief executive officer, and founder of Qi2 Technologies, LLC, an investment management company, and the managing member of Qi2 Partners LP, a domestic hedge fund. For additional information on long-term investing, go to www.longterminvestor.org.

RELATED READING

Sidewitz, R.M. [1999]. How I Double My Money Annually In The Market, Summa IRU Publishing.
_____ [2000]. How To Stop Sabotaging Your Trading Success: Mastering The Inner Realm, Summa Iru Publishing.

Zacks Investment Research, 155 North Wacker Drive, Chicago, IL 60606.





RM Sidewitz, Ph.D

Dr. Sidewitz is the President, Chief Executive Officer and founder of Qi2 Technologies, LLC, an investment management company and the Managing Member of Qi2 Partners LP, a domestic hedge fund. Dr. Sidewitz began his career on Wall Street in the mid-1960s with Moody's Investors Service. He then served as the Assistant Director of Research for a registered broker/dealer until 1971. In the ensuing years, he continued his pursuits as a private investor during which time he developed the proprietary methodology that is used by the Limited Partnership. Dr. Sidewitz is the author of two books, "How I Double My Money Annually in the Market" and "How to Stop Sabotaging Your Trading Success: Mastering the Inner Realm". He is a frequent contributor to numerous financial publications and continues to work closely with private clients.

Qi2 Technologies LLC has not added any product or service information to TRADERS' RESOURCE.
Title: Managing Partner
Company: Qi2 Technologies LLC
Address: 4800 Baseline Road, Suites E104-370
Boulder, CO 80303
Website: www.cybrlink.com
E-mail address: roy@cybrlink.com

Traders' Resource Links


Comments or Questions? Article Usefulness
5 (most useful)
4
3
2
1 (least useful)

PRINT THIS ARTICLE






S&C Subscription/Renewal




Request Information From Our Sponsors 

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

PTSK — The Professional Traders' Starter Kit
Home — S&C Magazine | Working Money Magazine | Traders.com Advantage | Online Store | Traders’ Resource
Add a Product to Traders’ Resource | Message Boards | Subscribe/Renew | Free Trial Issue | Article Code | Search

Copyright © 1982–2019 Technical Analysis, Inc. All rights reserved. Read our disclaimer & privacy statement.