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.