You likely read about a new trading strategy at least once a week if you follow the markets. Be it the math whiz who correlated the mating paths of elephants to the NASDAQ, or your quirky uncles spam emails in which he touts his 100% returns. As an investor I’m constantly trying to question the status quo of market philosophies to attempt to take advantage of them. One of the most prolific and long standing of strategy out there is “Buy and hold”. Touted by billionaires like Warren Buffet and likely your grandmother, this strategy has been around forever and offers little in the way of complexity, which is what makes it rather popular.
So when Jake Zamansky wrote “The death of the Buy and Hold investor” for Forbes, to say they least I was interested. In it Zamansky asks the question “Is buy and hold only for suckers”. He makes the case that “Such investors (“buy and holders”) are sitting ducks for the new breed of “high frequency” traders, the nefarious “dark pools” and Wall street firms who use retail investors as dumping grounds for their dubious products and shares.” Even A recent blog by CNBC producer John Melloy underscores how out of sync buy and hold investors are with the market.
The amount of data showing the disadvantage traditional, long-term investors currently face is staggering. As Mr. Melloy points out: “The average holding period for the S&P 500 SPDR (SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to worrying statistics in analyst Alan Newman’s latest Crosscurrents newsletter.”
“Given recent average volume, the SPY trades its entire capitalization and then some each and every week. Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest,’” according to the analyst.
So is it value investing as a whole that’s gone down the tubes, to the likes of hedge funders and high frequency traders? Can an average retail investor hold his or her own in the market still?
Well Richard Bernstein of Richard Bernstein Advisors offers the antithetical view of today’s high frequency trading mentality/environment and claims that buy and hold isn’t at all dead. Bernstein just says it’s misunderstood:
“Buy-and-hold strategies typically do perform well, but their success is predicated on buying and holding the correct assets. Having exposures to the correct market segments is called beta management, and investors tend to be very poor beta managers.
“Stocks for the long run” was the theme of the late 1990s and early-2000s, and investors were encouraged to buy-and-hold S&P 500 index funds. That seemed to make sense to them at the time because the US stock market had just finished one of its most successful performance decades in history. As a result, investors preferred US stocks. Unfortunately, US stocks subsequently underperformed.
Chart 2 shows why investors wanted to accentuate US stocks in their portfolios at the beginning of the 2000s. Chart 3 shows what actually happened in the subsequent ten years, and why investors perceive that there was a “lost decade in stocks” and that “buy and-hold is dead”. However, if one had bought and held emerging market stocks in 2000 rather than US stocks, one would be very happy today. If one had bought and held BRICs, one would be very happy today. Buy-and-hold has continued to be a viable investment strategy, so long as investors bought and held the correct stocks!
Ironically, many investors today seem to be following the same formula they followed last decade, and are again buying and holding the prior decade’s winners. In our opinion, these investors are positioning their portfolios for another “lost decade in equities”.”
You can check out the full article here.
So according to Bernstein its not so much a technical change in the market so much as investors are getting lazy and stopped doing their homework. Instead of identifying and purchasing good assets, investors are happy with buying last seasons winners and holding those, which is causing lackluster returns.
It seems there is certainly stillroom in the market for Buy and Hold at least for now, depending on which school of thought you subscribe to. Do you think hedge funders and computers have sucked all the possible value out of the market in a efficient market hypothesis type of way, or do you think there is still room for old fashion hard work and research. As usual only the market can truly dictate.