Listen: If I hear one more Warren Buffett wannabe blurt out, "It all depends on what you buy, and at what price you buy it," I might fling myself from the roof.
So how about we skirt the unpleasantness and recast this whole "buy and hold is dead" debate right now? We can start with a question I found a while back on Jim Cramer's blog that hits it right on the head. The CNBC star wrote: "Does the market work? ... Can it be counted on to do what it used to do, which is create wealth by investing in good companies and holding them over time?"
That's what I'm talking about!
See, I'm like you. I didn't need some "black swan" event to tell me that blue chips like Bank of America (NYSE: BAC ) can be a rough ride -- or even blow up altogether, a la Citigroup (NYSE: C ) and AIG (NYSE: AIG ) . I saw it with my own eyes in 1991, and I've read about it in books and watched it on Frontline.
I also know that Internet stocks got pricey in 1999 -- and when priced for perfection, even tech stalwarts like Oracle (Nasdaq: ORCL ) and Cisco (Nasdaq: CSCO ) struggle to deliver "expected" returns over the next few years. I didn't know this then -- after all, it seemed just as "true" in 1995 as in 1999 -- but I knew it was a possibility.
In other words, who cares whether the share prices of individual companies go up or down at intervals? Or whether (or when) they might go to zero -- which logic and history assure us they will do. I want to know whether investors looking to build wealth over the long term should be buying and holding common stocks.
It takes guts to answer yes
It's been tough, so I understand that. I don't understand the fluffiness of the debate (one guy directed me to an article showing how bonds beat stocks over a 10-year period, for Pete's sake). Ken Solow takes a more thoughtful tack in his new book, Buy and Hold Is Dead (Again). Solow makes a cogent plea for active portfolio management, though even he falls into a few traps I'd appreciate your thoughts on -- like when he insists that buy and hold doesn't work in bear markets, or when he compares buy-and-hold investors to farmers who plant the same crop in all seasons, when they'd be better off planting one in the summer and another in the winter. That sounds sensible, except for one thing: Comparing bull and bear markets to seasons is nonsense.
Now, imagine you're a farmer in North Carolina -- where "winter" lasts anywhere from one day to 18 months, and occurs anywhere from twice a year to once every seven years. Worse, every time the temperature drops 10 degrees below normal, people start screaming, "Winter is here, winter is here!" And every so often, they're right.
You see where I'm headed, right?
I mean, now you've got problems. How many times can we throw winter wheat in the ground on a cold day in June before we're left chewing the bark off the trees? Absent any discernable winter/summer cycle or clear signal of when winter is coming ... well, maybe we are better off planting one sturdy crop that does best across all seasons.
Of course, buy-and-hold haters assure us that this isn't their problem. They can tell bull and bear markets apart -- even though no less a luminary than John Bogle assures me they can't. This is how they knew to sell out in 1999, buy back in 2003, and sell out again in October 2007. What's never so clear is what to do right now. Solow, at least, gives us a methodology to follow.
According to Solow, buy and hold can work -- just not when valuations are high. Hey, at least that's something, especially if you're about to retire. Curiously, as you're about to see, Solow goes on to mine reams of data to prove that if stocks are "expensive" when you retire -- even by a simple price-to-earnings measure -- don't expect "normal" stock returns in your lifetime. Period.
In other words, buy and hold is dead!
At least for you it is. You'd better try something else. Before I share his solution (he calls it "tactical portfolio management"), and one of my own, I've got one more bone to pick. And that's the infuriating tendency of even good guys like Solow to pooh-pooh a century's worth of data showing that stocks make you money over long periods.
Most sing the familiar "this time it's different" tune. Some get downright fancy. Solow, for example, loves the "black swan" variation -- repeatedly citing the pampered turkey who faces a "revision of belief" on Thanksgiving Day. Apparently, like the turkey, we've been fattened by 100-plus years of dubious market returns -- and we're in for a whack.
Remarkably, his solution -- rotating into and out of stocks based on market valuations -- is supported by ... you guessed it ... historical data! So let me get this straight: I'm going to bail on buy-and-hold despite a century of data that says it will make me money -- and start jumping in and out depending on the market P/E because it worked in the past?
I think I'll stick with Buffett
Look, I'm no fan of the Jim Cramer bashing. You won't find me kneeling at the altar of Warren Buffett, either. I mean, nobody's that much smarter than we are, right? But when Cramer says something like, "You haven't made any money in 10 years, so buy-and-hold must come into question," I have to side with the Oracle.
After all, the appeal of buy-and-hold isn't that it works best in all markets or 10-year periods, but that it works over the long term -- across all types of markets. If you think you're smarter than Buffett and Bogle and can call the next bull market, more power to you. I, for one, know that I can't. At 44 years old, I'm in stocks and probably always be.
Of course, if you're a little older and have a nest egg you need to live off soon, Ken Solow is right about this: The next 10 years are critical to your success. So by all means, take a look at his book. He's a smart guy and makes some good points. And no matter what your age, here's something else you might want to consider.
Making money in all markets?
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They're even investing $1 million to prove they can do it. I'm a guy who's not about to run to cash, so they've got my attention, especially since David and Jeff's original Rule Breaker portfolio -- also a long/short portfolio -- returned 20% per year for nearly a decade, including triple-digit gains on Amazon.com (Nasdaq: AMZN ) and Amgen (Nasdaq: AMGN ) , among others.
Listen: I'm a buy-and-hold investor for life, black swans and a crappy past decade be damned. But that doesn't mean we can't make bank while we wait for our stocks move higher. If you want to learn how, David and Jeff are inviting Motley Fool readers to follow along with their portfolio in real time -- but only a small number and only for the next few days. If you want to join them, click here.
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