Is "buy and hold," the strategy of holding stocks for the long term, rather than seeking to time the markets or profit by shorter-term trading, obsolete? Some folks certainly think so.
"I think we are in a structural bear market that will last for 5 to 10 years...What is important for the investor is that the winning formula of buying and holding is not working anymore. In fact, it is working against him. If you cannot be successful in the current environment, get out. Leave it to those who can." That's asset manager Felix Zulauf, as quoted in The New York Times.
We've heard a lot of this kind of talk in recent months -- that we're in a "structural bear market" that will make buy and hold a useless strategy for the foreseeable future, and that individuals should leave the investing to experts.
And while it's easy to dismiss it when it comes from the usual CNBC talking heads, such stern words from a prominent asset manager, one whose opinions are frequently sought by publications such as Barron's, should be considered a little more carefully. Shouldn't they?
There's just one little thing I haven't mentioned
Here's the thing -- that quote from Zulauf isn't recent. It's from Sunday, March 3, 2002, from another bear market entirely! A deeper dig into the Foolish archives finds another round of similar talk from 1996, after a mere 7% correction in the S&P 500 in July of that year.
Such talk seems to be part of the general pessimism that accompanies -- or drives -- bear markets. As we saw back around the beginning of March, folks can get really pessimistic during tough times. Dire predictions of certain doom are just part of the overall bear market phenomenon, and history suggests that we can dismiss the worst of them without a second thought.
But wasn't Zulauf actually right?
One could argue he was -- the S&P 500 closed at 1131.78 on the Friday before that quote ran in the Times, and it went sharply downhill from there until late in the year. If you'd bought an S&P 500 index fund that day, you wouldn't have seen gains until 2004 -- and you'd be down more than 25% if you held until now.
But here's a point I'd like you to consider carefully: What's true for indexes isn't true for every stock in the market most of the time. While it's true that "all correlations go to 1 during crises," -- or, in other words, when everything is going down, everything's going down -- it is totally possible to make a lot of money with a buy-and-hold strategy, even if the market averages wander aimlessly for an extended period.
How? Stock selection.
Buy the good stuff and -- yes -- hold it
The best stocks will generally stay ahead of the market. For instance, ponder the performance of these three early recommendations of the then-brand-new Motley Fool Stock Advisor newsletter in the months immediately following Zulauf's comments:
|
Stock |
Date Recommended |
Gain Since Recommendation |
|---|---|---|
|
Activision Blizzard (NASDAQ:ATVI) |
September 2002 |
208.3% |
|
Amazon.com (NASDAQ:AMZN) |
October 2002 |
415.3% |
|
Marvel Entertainment (NYSE:MVL) |
July 2002 |
706.6% |
Source: Motley Fool.
Of course, the newsletter hasn't held every single stock it ever bought. Stocks like Sanderson Farms (NASDAQ:SAFM) and Affiliated Managers Group (NYSE:AMG) produced nice gains, but Fool co-founders Tom and David Gardner still sold them when they no longer believed they were the best place for their readers' money.
And not all of their first-year picks worked out so well. Websense (NASDAQ:WBSN) lost over 15% before being dumped in July 2003, for instance, and there were a few others like Time Warner (NYSE:TWX) that didn't pan out the way they'd hoped. That's the nature of stock picking -- even legends like Peter Lynch are wrong now and then. But the Gardner brothers have done well enough to put together a market-beating track record since Stock Advisor's inception in April 2002.
You may or may not do as well as they have, but you can learn to choose stocks that will help your nest egg grow, no matter what the market averages do.
The upshot
Here's what I'd like to leave you with: Even if "the market" doesn't sustain this current rally, even if the economy and the markets stay sluggish for an extended period, there will be good stocks delivering outsized returns. While an index fund is an easy -- and pretty good -- solution during normal times, if you're concerned about market stagnation, put your efforts into good stock selection.
One last thing: If you'd like to learn about some promising stocks to buy today, why not help yourself to a free trial of Stock Advisor? Signup takes just a few seconds, and gives full access for 30 days with absolutely no obligation. Click here to get started.
