Is Buy and Hold Dead?

Is "buy and hold," as an investing strategy, dead?

Jeff Macke, a trader on CNBC's "Fast Money," certainly thinks so. Just last month he declared, "2008 is the year that will go down in history as the year that long-term investment died as a thesis."

Is he serious?

Apparently, he is
"Buying and holding isn't going to make you money anytime soon," Macke says. "Whether you're looking at Cisco (Nasdaq: CSCO  ) or Potash (NYSE: POT  ) , don't just hold on hoping to see new highs." In fact, he thinks you'd have to hold on for a very long time.

What Macke is criticizing, though, isn't what I'd call buy and hold. Buy and hold is a business-focused approach that emphasizes buying stock in quality companies that are poised to produce consistent and positive returns over the long term -- and then holding the stock for a period of years to realize the returns generated from the company's profit.

What he's mischaracterizing as "buy and hold" is really a form of timing the market -- trying to predict and thus profit from a stock's short-term movements.

Instead, Macke and his fellow traders think you should go into every stock with a designated -- and short-term -- exit strategy to lock in profits. Tim Seymour argues that "It's very important to take profits in trades. You can't be in a market like this and be asleep at the switch."

But what these traders advocate isn't investing -- it's speculating. It may seem like an easy path to profits, but it has added costs that can weigh on a trader's bottom line.

It'll cost you ...
First, moving in and out of stock positions frequently is expensive. Trading fees and short-term capital gains taxes will quickly eat away at not only your real returns, but your future profits in the form of all that compounding that will never happen.

Second, this kind of trading -- which requires you to track your purchases and your prospects on an hour-by-hour basis -- takes a lot of time. Unless you're a professional trader, you likely don't have time to be chained to your stock quotes whenever the market is open.

Buy and hold investing, on the other hand, reduces frictional costs, boosts long-term compounded gains, and minimizes research time because it focuses on businesses -- which change much less frequently than a stock price. So why is the CNBC crowd telling us that the days of business-focused investing are finished?

We can only speculate
Basically, it's in their interest -- not yours -- to promote short-term, speculative trading.

Market commentary necessarily relies on short-term information to power the 24/7 news cycle. Focusing on trading rather than investing requires viewers to tune in frequently -- and more frequent viewers means increased advertising revenue for CNBC's parent company, General Electric (NYSE: GE  ) .

Brokerage houses like E*Trade (Nasdaq: ETFC  ) and Charles Schwab (Nasdaq: SCHW  ) certainly don't mind the increased trading, since it nets them more in commissions and fees.

As Upton Sinclair said, ''If is difficult to get a man to understand something when his salary depends upon his not understanding it.''

Your returns depend on understanding it
It is in your interest to buy stocks in great companies, because business-focused investing has created wealth (and accidental billionaires) during good markets and bad. In fact, buying stocks in strong companies with solid dividends and letting those dividends compound over time is the strategy behind many of today's fortunes.

Why do dividend payers outperform? For one, they smooth out the short-term price fluctuations of the market by providing you with a regular income -- one you can reinvest for even better long-term returns.

Regular dividend payments also signal a company's strength. Johnson & Johnson (NYSE: JNJ  ) has increased its regular dividend steadily since 1972, and it has outperformed the S&P 500 over that time period, even including the recent market carnage. Ditto for Procter & Gamble (NYSE: PG  ) , which has been paying dividends since 1891! Those ongoing profits produce ongoing returns.

Stocks to own forever
If you want to maximize your time as well as your returns, buy excellent dividend-paying companies and hold them for the long term. Warren Buffet, one of buy and hold's most famous and successful acolytes, says his favorite holding period is "forever."

That's the strategy we follow at Motley Fool Income Investor, and even without accounting for the frictional costs of day trading, our recommendations are beating the S&P 500 by an average of 5 percentage points -- and over time those 5 points, and those frictional costs, will make a substantial difference to your bottom line. A 30-day free trial will let you see what we're recommending -- free of charge. Just click here to get started.

Fool contributor Matt Hoffman has cut down his CNBC consumption significantly. He owns shares of none of the companies mentioned in this article. Schwab is a Motley Fool Stock Advisor recommendation. Johnson & Johnson is an Income Investor pick. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (33)

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 January 05, 2009, at 5:06 PM, PennyPincher12 wrote:

    Soros is the greatest speculator of all time - making more off of management fees than investing his own money, and he still needs about 50 billion more to catch Buffett.

    I think I'll go with buy and hold.

  • Report this Comment On January 05, 2009, at 5:08 PM, ontheemmis wrote:

    Buy and hold is a trap.

    In this bear market which in my opinion started to show itself in November or December 2007 I was a buy and hold investor except in my online E Trade account.

    If I wasn't trapped in a buy and hold strategy my paper losses would have been about $150,000 instead of over $500,000.

    I had stocks that had doubled and tripled by the end of October 2007. My adviser did not believe in selling specific stocks, instead he rode it all the way down to a disaster. One example besides all of the energy stocks that were held and fell more than 40% is Rio Tinto {RTP}.

    Purchased for $200 went to $560 now at $100. I still own it. That is my tale of woe.

    PS I actually pay them to do this stuff.

  • Report this Comment On January 05, 2009, at 7:03 PM, omt68 wrote:

    Investing is almost by definition buy and hold. However, on a true buy and hold strategy in securities one will not know whether the strategy was a good one until the day of sale.

    Individual, astute invsestors with enough time on hand and the wherewithall to analyse and evaluate businesses may be able to beat the market by buying and selling short term.

    For the rest of us, we are better off practising buy and hold. The kind of investments to buy should be determined by ones tolerance for downside risk.

    If the past four months have thaught anything, it is to diversify. For the vast majority of us that invest for retirement the lesson should be: build enough cash and fixed income and manage your money so you are not forced to sell stock in a down market.

    The principle is very simple. The application is not always so.

  • Report this Comment On January 05, 2009, at 10:09 PM, mdg40 wrote:

    The philosophy I like so far is Jim Cramer's "Buy and Homework", he advocates 1/2 hour of homework every week for every stock you own. Add to that the Fool's advice to only sell if the market is exceptionally greedy or the company has changed enough to make the investment unsound, and I think you have a good framework.

    Even though Buffet's preferred holding period is "forever", let's remember that he is getting back into the market with his personal account which had previously been in bonds. I don't think anyone can say they definitely won't sell given the right circumstaces.

  • Report this Comment On January 05, 2009, at 10:18 PM, 50Ozi wrote:

    I wish I understood, among other things:

    George Soros's breaking of the Bank of England,

    Barclay's trader's's trashing of Barclay's,

    the abandonment of the gold standard,

    things like these.

  • Report this Comment On January 05, 2009, at 10:55 PM, LynSteichen wrote:

    I agree with this article for the most part however I dont think taking some profit when prudent to do so is wrong. Some call it trading aroud a core position,which I buy and hold.

  • Report this Comment On January 06, 2009, at 2:07 PM, PennyPincher12 wrote:

    ontheemis - buy and hold doesn't mean buy at any price and hold no matter the quotation.

    coke is 18 times earnings now, even though the stock shed $20.

    pepsi is trading around 16 times earnings, even though the stock shed $30.

    although, just indexing and dollar cost averaging every month is a good long-term program, i'm assuming most of us here like to design our own portfolios.

    buy and hold, value investing, is about buying at a sensible price (like the prices now on good stocks) and holding until the market is valuing them too high to make business sense.

  • Report this Comment On January 06, 2009, at 4:23 PM, 181736065 wrote:

    "So why is the CNBC crowd telling us that the days of business-focused investing are finished?

    Basically, it's in their interest -- not yours -- to promote short-term, speculative trading.

    Market commentary necessarily relies on short-term information to power the 24/7 news cycle. Focusing on trading rather than investing requires viewers to tune in frequently -- and more frequent viewers means increased advertising revenue for CNBC's parent company, General Electric .

    Brokerage houses like E*Trade and Charles Schwab certainly don't mind the increased trading, since it nets them more in commissions and fees.

    As Upton Sinclair said, ''If is difficult to get a man to understand something when his salary depends upon his not understanding it.''"

    Yes, and the same can be said, only opposite, for "monthly" services like TMF. TMF's monthly design is not applicable to "trading".

    It's in TMF's interest to promote "buy and hold".

  • Report this Comment On January 06, 2009, at 4:28 PM, MADACASTO wrote:

    Wait...investing/trading philosophies aside - is TMF really telling me that there are organizations that profit from the mentality that they promote? ie. CNBC, ETFC, SCHW????? What exactly is TMF promoting in this very article??? "Just click here to get started."

    So, I need to pay for your advice in order to buy and hold successfully? What a croc! How are those stock picks 2008 doing? Hope you're buying and holding....practice what you preach.

  • Report this Comment On January 07, 2009, at 6:59 PM, kayakmastr wrote:

    We have just learned that buy and hold is dead! And we paid a big price for this learning experience. It is rare to double your money in a year, but guess what buying and selling 4 times a year with a 25% gain each time produces!

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