The problem with the word "nice," as George Carlin once pointed out, is that it doesn't really mean anything -- "Isn't she nice!? And he's nice, too! They are sooooo nice."
I have come to the conclusion that the investing anthem "long-term buy-and-hold" suffers from exactly the same problem. It has come to mean so many different things to so many different people, that it no longer really means anything.
Usually, trite is annoying but harmless. However, evidence is mounting that this meaningless phrase is doing more than just bemusing investors. It may actually be confusing them. To the extent that it leads to poor investment decisions, it is serious.
In hopes of nipping this problem in the bud, then, I suggest that we banish the phrase "buy-and-hold" forever and instead say exactly what we mean.
"Buy-and-hold" never sufficed
What!? The Fool banish buy-and-hold? Has the Earth stopped turning on its axis? Can technical analysis be far behind?
Never fear, mon Fool. We are still defending, with religious fervor, our traditional investing turf. It's just that "buy-and-hold" has never really described this turf so well. As exhibit number one in support of this conclusion, consider a Jane Bryant Quinn Newsweek piece, which ran in May of '99, labeled "Why Buy-and-Hold Doesn't Always Work" on the print edition's cover.
As I understand Ms. Quinn, "buy-and-hold" is defined as the blind purchase of "leading growth stocks" to be held -- indeed cheered -- indefinitely, without criticism, without following their business results carefully, and without fear of risk. And, really, who can blame her? "Buy-and-hold" would be a good name for such a strategy.
Allow me, however, to be the one-millionth Fool to repeat it: This is a lousy strategy! While it's true that we're religious about our buy-and-hold here at the Fool, this is definitely not our buy-and-hold. If this surprises a lot of people, we haven't been doing our jobs very well.
"Buy-and-hold" and the Rule Breaker
If you think that Amazon's (Nasdaq: AMZN) inclusion in the Rule Breaker Portfolio is our recommendation to buy the company's stock, recklessly cheer its successes, stubbornly ignore its failings and, for the most part, just ignore the business until that glorious day -- five to 10 years hence -- when you return to cash in, think again! I'm here today to remind you of the non-trivial probability that this "glorious day" might actually suck. You might even find Amazon long bankrupt and your shares worthless.
Clearly, we expect "that day" to be a glorious one or we wouldn't be holding Amazon. Amazon wasn't purchased blindly. It satisfies the strict Rule Breaker principles that carefully pare down the universe of possible mega-growth stocks (a rare few will fulfill this promise!). These Rule Breaker criteria are laid out in 128 thoughtful pages, exactly 127 pages more than it would take to suggest that one simply "take the [...] leading growth stocks," the flawed strategy Ms. Quinn seeks to lay bare.
You, however, should check that Amazon meets the Rule Breaker criteria according to your own analysis. Moreover, you should consider the possibility that these unproven criteria may not be useful in the future or that, indeed, we might not know anything that you don't already know.
Focus on the business
So is there any useful meaning to "buy-and-hold? Well, on the road to a more precise definition, let's start with a small, but critical, distinction.
On one hand, we have public corporations, planning their business models, communicating them to investors and employees, setting objectives, creating unified, well-led teams charged with meeting these objectives, booking sales, managing costs, planning and managing capital financing, and so on and so on. This is the arena where, in our opinion, all the interesting, meaningful stuff happens.
You know that you are safely in this business arena when you discuss ideas and statistics (e.g., revenue growth, profit margins, Foolish Flow Ratio, debt ratios) that you could just as easily apply to private companies for which no stock price -- public valuation -- is available.
On the other hand, we have stock markets. In the long run, of course, markets and business results are aligned. They have to be. But in the short run, the fuel that powers stock markets is usually not business results, but speculation on what these results might be (if you've ever wondered why stock prices often fall on strong earnings, you may have missed this distinction). "Expert" meta-speculation on this price speculation dominates much of the financial press, but, frankly, we Fools find this investing arena to be on the dull, useless side.
You know that you have crossed over into the stock market arena when you start relating business results to stock price (see price-to-earnings ratio) or, in the case of some technical analysis, you study market prices and trading volumes only, completely independent of business results.
Nobody is saying that market valuation is completely irrelevant. Clearly, for every stock there is a price where -- no matter how well the company performs in the business arena -- there is no hope of market-beating share price appreciation, the only sensible goal for investors who choose individual stocks.
Just as value investors glance at growth metrics, Rule Breaker investors should glance at value metrics. We just don't focus on them. Only in the most extreme circumstances will we eliminate potential Rule Breaker picks based on market valuation. The history of past Rule Breakers warns us, clearly, that over-focus on value will cause us to skip over the very companies we are seeking. Indeed, it is the province of high-growth investing -- where most price appreciation occurs in unpredictable spurts -- that business-focused strategies make the most sense.
Replace "Buy-and-hold" with "Focus on the business"
So, with this distinction -- business vs. stock market arena -- digested, I'm ready to propose a new anthem for Motley Fool investing strategies. We promote "business-focused" approaches. De-emphasis of market speculation is THE distinguishing characteristic behind all of our portfolios, NOT extended holding times or blind faith in our favorite tech-sector companies.
In fact, business-focused investors are encouraged to be absolutely ruthless when they discover evidence of systemic weakness in the business models they hold. Selling shares as soon as one day after purchase -- based on significant, new business-focused information -- is not a violation of what we preach. No, sir. We simply discourage buys or sells in reaction to the market-focused price swings driven by speculators.
Once we become part owners of our business, we shut out this din of easy, ongoing, pervasive distraction, like mysterious analyst downgrades and Greenspan updates. Instead, we take the more difficult path, meditating actively on the true path of financial statements, market share, and other indicators of true business health.
In my personal experience, success in almost anything has never been the product of extreme diligence in "figuring things out." To be sure, analytic skill is a key prerequisite for investing success, but just as important is the resolve to settle on a strategy and the discipline to implement it. In fact, relentless efforts at perfecting already-effective strategies -- although often praised in popular culture -- have always been less productive, for me, than applying this same effort to a focused implementation of the imperfect strategy would have been.
What makes focused implementation tough -- what makes success more rare than common -- is our human inclination towards compulsive submission to life's noisy, day-to-day temptations (like comparing ourselves to our neighbors and our stock picks to theirs). Indeed, maintaining focus on the goal in spite of the daily noise may be the best recipe for success anywhere, from religion to relationships, from sports to investing (anyone remember a little fable about a tortoise and a hare?).
While traders attempt to beat the stock market at its short-term pricing game, business-focused investors let the power of successful business models do the work for them. Of course, technically, both are trying to beat the market and both are banking on market bias in pricing, but I think this comparison lends some perspective to these opposing strategies.
Now, it would take superhuman discipline to ignore the noise completely, and we Fools are merely human. I'm confident that even the venerable Jeff Fischer slides onto a park bench every now and then with a stock market rag tucked into his hollowed-out Buffett biography. But with an eye focused firmly on the endpoint, a true Fool makes lighthearted fun out of this giant distraction.
After all, we are "business-focused" investors.
Paul Commins has spent most of his life trying to maintain focus, but his intense aversion to "long-term buy-and-hold" is an exception. It has only grown stronger since he griped about it here the first time. He doesn't own any stocks mentioned in this article. The Motley Fool is investors writing for investors.