2009-03-08 01:33:10
Is Buy-and-Hold Investing Dead?
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Over the past 20-30 years, the entire concept of "buy and hold" investing has really taken root.
The concept of "buy and hold" investing is a simple one - you add assets (usually stocks or mutual funds) to your portfolio, and hold them for a very long period of time.
With "buy and hold" investing, you ignore the gyrations of the markets and stand firm with your investments. According to the "buy and hold" philosophy, strong companies will be rewarded with higher valuations over time, so there is really no reason to ever sell.
This philosophy of investing served North American investors very well over the past few decades.
Warren Buffett, a champion of the "buy and hold" strategy, has built a hundred billion dollar company through this type of investing. Berkshire Hathaway has held positions in a number of companies for decades, including American Express and Coca-Cola.
However, the "buy and hold" investment strategy has taken it on the chin in the past year and a half.
Many people who employ this style of investing have seen decades of gains get flushed down the toilet in just a few short months.
Companies that earned spots in many "buy and hold" portfolios are on the brink of being worthless. Citigroup, Bank of America, General Motors - the list goes on and on. Even General Electric is having major problems. General Electric!
I've talked to many people who insist that Citigroup, General Motors and the others "aren't going away", and that adding to their positions at these low levels is a no-brainer investment. "Buy and hold" investing, they say, argues that you should take advantage of these market downturns and continue to add to your portfolio.
However, with the markets continuing to spin lower, more and more people are abandoning the "buy and hold" philosophy and simply switching to cash.
This leads us to the question - is buy and hold investing dead? And if so, why?
Let's first look at the reasons why many people will be reluctant to use a "buy and hold" style of investing in the future, especially as it applies to the stock market:
1. Faith in the stock market as a wealth creation device is permanently broken. People just don't believe anymore that a long-term commitment to the stock market will result in riches and above-average returns. The trust that investors had in the stock market has been irrevocably broken.
2. People don't trust the markets anymore.
3. Warren Buffett has taken it on the chin in the past year, both with his investments and in the court of public opinion. Gone are the days of people unanimously praising the beloved and sage Buffett. Now people are taking constant shots at him, disparaging his pleas to buy stocks and poking holes in his investment strategies. Berkshire Hathaway has slumped badly over the past few years - his equity positions are plummeting in value and there are concerns over his huge options positions.
Buffett is the king of the "buy and hold" investment strategy, and suddenly people are turning his back on him.
4. Government bail-outs are diluting common shareholders. In this environment, why would anybody choose to buy common shares in a company? Look at Citigroup - the government recently converted their preferred shares to common, resulting in the heavy dilution of existing shareholders. Which companies are next? Why would anyone want to hold common shares in this environment?
5. Recent downturn has wiped out most (if not all) of the gains long-term investors have enjoyed over the past 15-20 years. Many people started investing in the late 90s - this is when following the market started to become popular, and when many decided to use the stock market to finance their retirements.
The average person who started investing at this time is down badly, especially when adjusting for inflation.
People who started investing in the early 90s (which is when many Baby Boomers started making serious money and investing for their retirements) have seen most (if not all) of their gains disappear.
Number five is the real killer, and the reason why many people will never return to investing in the stock market for the long-term.
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For the average investor, the "buy and hold" investment philosophy is likely to be dead and buried until some trust in the markets has been restored. People will need to get excited again about the long-term prospects of the markets, and in order for this to happen, a sustained bull market will need to take place.
When will this happen? Your guess is as good as mine.
Until then, I think that the average person will be more than happy to stay in cash and try to pay down personal debt.
The idea that people will plunge head-first back into the markets at the first sign of a recovery is probably foolish thinking.
I think that most people are sick of the markets in general, and will still far away for a long, long time.
Is "buy and hold" investing dead? For the time being, most definitely.
Filed under: The Economic Meltdown
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COMMENTS
Comment by Jeff on March 08, 2009 @ 8:14 pm
Nobody believes that there is a better alternative to free markets. Individuals may choose more secure methods but in the end the money will end up in the market somewhere.
I agree with most of your points. People have lost faith. The Government will over react. The markets will price all that in. It may be years before we regain the price levels we have seen in the last 10 years.
But I don't agree that buy and hold is dead. The memory of today will be erased when the people buying today are rewarded in another 10 years. And if we are lucky, the Government will do some things right and prevent some of the excess we have seen.
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