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The Best News Ever for Buy-and-Hold Investors

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In today's high-paced investing world, you might think that buy-and-hold investing is a long-lost relic from a nearly forgotten age. But the investing style that Warren Buffett and countless other long-term investors have used to reap huge gains over the decades is far from dead -- and rather than letting it weaken your resolve, pundits who pronounce buy-and-hold investing dead actually make it easier for long-term investors to do their jobs.

The rise of the machines
Recently, high-frequency trading has had a huge impact on the stock market. As a CNBC article (titled "Is the Buy & Hold Stock Strategy Officially Dead?") noted yesterday, figures from stock analyst Alan Newman show that exchange-traded funds have made it easier than ever for algorithm-driven machines to work their magic. The article cites the huge volumes of shares of the SPDR S&P 500 ETF (NYSE: SPY  ) that trade every day, producing an average holding period of just five days. Looking more broadly at the market, the average holding period for stocks overall has shortened from four years prior to 2000 to just over three months now.

Predictably, this has made the general public wary of investing in the market. Seeing institutions tripping over themselves to grab every penny of profit they can at the expense of slower-paced investors has convinced them that the Wall Street game is rigged.

There's some truth to that belief. But it's only true if you force yourself to play Wall Street's game. Fortunately, you don't have to do that.

Time is on your side (yes, it is)
Just last week, fellow Fool Matt Koppenheffer gave investors four tools you can use to beat uncertainty and rising complexity in your portfolio. I highly recommend reading Matt's article, because all four of his suggestions are extremely useful if you're planning on investing for the long haul.

But the thing that's most important for buy-and-hold investors is the last of Matt's suggestions -- namely, to use what he referred to as time arbitrage. He notes that short-term challenges often make investors nervous about a stock even when its long-term prospects aren't really under any big threat.

Taking this concept a step further, the things that high-frequency traders are looking for often bear no resemblance whatsoever to what long-term investors seek. With many trading systems benefiting from volatility, stocks with a high degree of uncertainty can be especially valuable. That's why First Solar (Nasdaq: FSLR  ) has had heightened daily volume for some time now; troubles on the solar front have investors more nervous than ever, and traders can pick up on that nervousness and use it to their advantage. The same trends apply to Netflix (Nasdaq: NFLX  ) , whose business model is coming under question, as its latest results included a quarterly loss and a drop in revenue. Materials-related stocks U.S. Steel (NYSE: X  ) and Alpha Natural Resources (NYSE: ANR  ) have also been held captive to news about the broader economy lately, and so share volumes have picked up. At their recent pace of trading, all of these stocks have their entire float change hands within 20 trading days or less.

It's essential to avoid trying to meet these quick traders head-on. View buying and selling stocks the same way you would a transaction involving your car or your home -- something you'll want to do from time to time, but not something you could afford to do day in and day out.

Why you don't have to play
Buy-and-hold isn't the same thing as buy-and-ignore, so you shouldn't feel like the only way to win against Wall Street is never to change your mind about a stock. But you have to pay attention to the right information -- not falling prey to emotionally driven decision-making but instead focusing on the fundamental factors that affect a stock, an industry, or even an entire economy over time. That's your best way to filter out the noise and take action with things that truly matter.

The key takeaway from the proclaimed death of buy-and-hold is that the mass of investors have given up on what has traditionally been an extremely successful way to make money in the market. That leaves the field wide open for those who measure performance in market-cycles rather than months or milliseconds.

We've got some ideas for stocks that you can use for just such a strategy. I invite you to read the Motley Fool's special report on investing for retirement, where you'll find three names of stocks that could give you everything you want in a long-term investment. Just click here and start reading your free copy right now.

Fool contributor Dan Caplinger enjoys thinking about the longer-term view. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Netflix and has sold shares of SPDR S&P 500 short. Motley Fool newsletter services have recommended buying shares of Netflix and First Solar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy always has time for you.


Read/Post Comments (2) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2012, at 10:57 AM, bossman5000 wrote:

    What news is the best news? There was no news. There were a bunch of words here that didn't tell me anything.

  • Report this Comment On June 26, 2012, at 4:35 PM, TMFGalagan wrote:

    @bossman5000 - The best news for buy-and-hold investors is that most people have no interest in buy-and-hold investing. That means you're not competing with other long-term-minded investors for the best long-term investment prospects.

    best,

    dan (TMF Galagan)

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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