The Buy and Hold Apocalypse
Buy and Hold
If something is quoted often enough as fact, the resulting myth dominates our memory. An old journalism adage advises, "When the myth becomes truth, print the myth." Generations of business writers armed with journalism degrees and a penchant for not checking the historical veracity of their sources have perpetuated flatly incorrect beliefs for decades, one of which I want to outline and disprove today in order to illustrate the power of the much-maligned "buy and hold approach."
In an ill-fated 1929 Ladies Home Journal article called "Everybody Ought to Be Rich," General Motors executive John J. Raskob extolled the virtues of long-term investing. Raskob counseled his readers to invest a mere $15 a month in the market and to expect a massive payoff of $80,000 in 20 years -- a compound annual return in excess of 15%. Of course, a few short months after Raskob penned his essay, the market completely imploded and public confidence in the stock market was absolutely shattered.
Marty Zweig recently referred to Raskob in an interview discussing the recent market correction, smugly pointing to this as an example of where exuberant sentiment occurred before a large market correction. "Everyone knows Raskob was wrong," Zweig quipped. Sadly, the wide-eyed financial journalists who routinely interview gooroos like Zweig fail to verify the full implications of what they say. One who had read Ben Graham's analysis of Raskob's advice in The Intelligent Investor would have would have probably printed that Raskob was not totally wrong.
It is certainly a fact that anyone following Raskob's advice would not have come out with the $80,000 he promised after 20 years. However, to conclude that someone following his advice would have lost money does not necessarily follow. When Graham analyzed the facts in the early '40s, he concluded that if an investor spent the $15 buying equal amounts of the thirty Dow stocks on a monthly basis starting in late 1929 at the market top, 20 years later they would have $8500. This would have been an average annual return of better than 8%, not that far from the average 10.5% large capitalization stocks have returned since 1926. And this with the Dow at 300 in 1929 and having slid to 177 in 1949. (Yet another example of how indices do not reflect real returns, explored in Evening News on July 29th and July 30th.)