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Buy and Hold Is Dead? Read This!

If I hear one more Warren Buffett knockoff blurt out, "It all depends on what you buy, and at what price you buy it," I might fling one of us off a roof.

So let's skip the unpleasantness and recast this whole "buy and hold is dead" debate -- starting with a question I found a while back on Jim Cramer's blog. The CNBC star mused: "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 get rough, or even blow up altogether -- see Citigroup (NYSE: C  ) and AIG (NYSE: AIG  ) . I lived through it 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 I know that when they're priced for perfection, even tech stalwarts like Microsoft (Nasdaq: MSFT  ) and Dell (Nasdaq: DELL  ) can struggle to earn investors "expected" returns over the next few years. Of course, I didn't know this ahead of time -- after all, tech seemed expensive in 1995, too -- 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 history assures us they will do. We need to know, as Cramer asks, whether investors looking to build wealth over the long term should be buying and holding common stocks right now.

It takes guts to answer "yes"
We had a few tough years, so I get it. What I don't get is the fluffiness of the debate. One guy directed me to an article showing how bonds beat stocks over a 10-year period. I have sweaters that are 10 years old, 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 what he calls 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 silly 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 irregular, unpredictable bull and bear markets to seasons is nonsense. After all, imagine you're a farmer in North Carolina. Only winter doesn't last for three months once each year -- it lasts anywhere from one day to 18 months, and it 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 real problems. How many times can we throw winter wheat in the ground on a cold morning in June before we're left chewing the bark off the trees? With no discernable pattern to the seasons, or clear signal that winter is coming ... well, maybe we're better off planting one sturdy crop that does well across all seasons.

Of course, the new buy-and-hold bashers 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, sell out again in October 2007, and buy back last March. 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, 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 – you shouldn'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. I'm infuriated by the 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 "this time it's different" tune. Some get fancy. Solow, for example, loves the "black swan" argument. He supports this with a second agricultural analogy -- the pampered turkey who suffers a "revision of belief" on Thanksgiving Day. Apparently, like the turkey, we've been fattened up by 100-plus years of dubious stock returns -- and we're in for a whack.

Remarkably, Solow's 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 Jim Cramer basher. You won't find me kneeling at the altar of Warren Buffett, either. I mean, nobody's that much smarter than I am, 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 Buffett.

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 you believe you can call the next bull market, more power to you. I, for one, know that I can't. At 45 years old, I'm in stocks, and I probably always be.

Of course, if you're a little older and have a nest egg you need to start drawing down 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?
Two of my colleagues and (in the spirit of full disclosure) personal friends think they have a better solution. Motley Fool co-founder David Gardner and Jeff Fischer are using a wide range of investments and hedge strategies, including shorts, options, and exchange-traded funds, to preserve their wealth and make money in choppy markets -- minus the volatility and without selling your stocks.

They're even investing $1 million to prove they can do it. As a guy who's not about to run to cash, 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 (Nasdaq: AMZN  ) and Amgen (Nasdaq: AMGN  ) , among others.

Listen: I'm a buy-and-hold investor, black swans and a crappy past decade be damned. But that doesn't mean we can't protect our hard-earned gains and make some extra cash 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 five days. If you want to join them, click here.

This article was originally published on June 20, 2009. It has been updated.

Fool writer Paul Elliott owns shares of Bank of America. Amazon is a Motley Fool Stock Advisor recommendation. Microsoft is an Inside Value pick. Motley Fool Options recommended buying diagonal calls on Microsoft. To learn more about Motley Fool Pro, simply enter your email address in the box above and click the button. The Motley Fool is investors writing for investors.

Read/Post Comments (4) | Recommend This Article (6)

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 22, 2010, at 7:34 PM, SUPERMANSTOCKS wrote:

    I do not go for buy and hold myself. I have only one stock that I will do that with and that is Motorola. Because with them I will never know. But my bottom line is all about the swing trade. Buy something and never keep it more than a month if possible.

    I am short term on all if not most stocks.

  • Report this Comment On January 22, 2010, at 11:14 PM, ozzfan1317 wrote:

    I have 4 Long term holdings BP,MSFT,KO and GMCR I also plan to Hold Ebix long term possibly. DAR will most likely be sold when I feel its upside is exhausted.

  • Report this Comment On January 22, 2010, at 11:15 PM, ozzfan1317 wrote:

    I have 4 Long term holdings BP,MSFT,KO and GMCR I also plan to Hold Ebix long term possibly. DAR will most likely be sold when I feel its upside is exhausted.

  • Report this Comment On January 25, 2010, at 12:13 PM, belihe wrote:

    Not that I would know exactly but it seems to me that if we as investors, especially as a mass of investors, all start picking of the profits, buying and selling long enough to turn a buck and run, and not allowing the money we invest to buisnesses any time to actually be of assistance to those businesses, won't we just do the same thing to the market that the banks have just done to the mortgagers and themselves? Won't we just pick everything so clean that we have nothing left to pick at? IS that how it works or do I have this all wrong? Isn't the investment supposed to help the company grow too and thereby do well for both? I am still learning. If I am right about how it works and we proceeded with what I think is basically day trading,( I think), wouldn't we just all be out to get the carcase before the other guy gets it? What happens when even the bones have been devoured? We have already seen how that works for us.

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