As you may be aware, we've had a lot of discussions around Fooldom regarding the (greatly exaggerated?) death of buy and hold investing. We asked some of our newsletter advisors for their thoughts last week. Today, we ask some of our Foolish writer-analysts for their thoughts (and we welcome you to chime in via the comments section below):
Is buy and hold dead? How does your personal investing philosophy differ?
Richard Gibbons: A total buy and hold strategy never made sense -- it was a concept pitched by mutual funds to discourage investors from withdrawing money despite funds' lousy performance.
Charlie Munger has said, "all intelligent investing is value investing", and value investing doesn't just mean you should buy cheap stocks. It also means that you should sell stocks when they become significantly overvalued. Warren Buffett said as much in a 2003 interview, noting that, while Coke (NYSE:KO) is a great business, he should have sold his position in the late 1990s when the stock became grossly overvalued. Blindly holding, completely ignoring valuation, is nuts.
That said, buy and hold makes more sense now than it has in a decade, because many stocks are unreasonably cheap. Now is the time to be buying great businesses that you intend to hold for a long time. It's ironic that this crash may cause investors to abandon buy and hold right when the strategy is most attractive.
Chuck Saletta: Especially for investors who own individual stocks, buy and blindly hold should have died a long time ago. If a company's business deteriorates and shows no sign of recovery, or if its market price has gotten dramatically ahead of its intrinsic value, sell!
Buying with the intention to hold, however, is still a great way to invest. As long as a company remains fundamentally, competitively, and operationally strong, isn't in danger of being regulated or innovated out of business, and is not grossly overpriced, why not hold on?
Personally, I'm happy owning shares in quality, dividend-growth companies at reasonable valuations. For instance, I own shares of oil pipeline giant Kinder Morgan Management (NYSE:KMR). Unless its business or capital structure falls apart, its dividends become unsupportable, or its shares skyrocket into the stratosphere, I'm happy holding. But the thinking shouldn't stop just because the buy decision has been made.
Andy Louis-Charles: Buy and hold isn't dead, but has been largely mythologized. Surprisingly, Jim Cramer offers an appropriate paraphrase of the concept when he advises his audience to "buy and homework." For true value hounds, the real ethos is more like "buy and monitor intrinsic value", but that's not quite as snappy.
If you look at Buffett during his partnership days, he was more of a value arbitrageur. He would determine the intrinsic value of equities and then allow the market to serve him -- buying when stocks he liked traded at significant discounts to fair value and selling when they approached or exceeded full value. Rinse and repeat. He drifted toward longer term "buys and holds" when his capital levels and ownership stakes reached a critical mass at which it became impractical for him to trade in-and-out of his positions.
Brian Orelli: Buy and hold has always been partially dead in my biotech corner of the investing world. Because of the high risk that development-stage drugmakers carry, smart investors get out when the risks outsize the rewards. Sometimes that happens after the approval, sometimes before, sometimes it never happens and you do get to hold a company like Celgene (NASDAQ:CELG) for an outstanding 1,159% return over five years.
The high volatility of late has caused wide swings in the values of companies. I think overreaction, sometimes on no news at all, is a good reason to buy or sell -- depending on which way the overreaction went. It's not much different than value investing; the time frame is just shrunken considerably.
Alex Dumortier: I asked a similar question to Andrew Smithers -- one of the best minds practicing finance today -- when I interviewed him at the beginning of the year. This was part of his response: "It is sad that the idea that price doesn't matter, which as Jeremy Grantham has noted is 'what buy and hold' means, should ever have become seriously considered."
I have to agree. While it is certainly advisable to adopt a long-term view when investing in equities, investors should recognize that there are times at which valuations are such that being invested in stocks is distinctly unattractive and prospective returns are likely to be very disappointing. Price will always matter and there are times at which one cannot prudently recommend owning the S&P Depositary Receipts ETF (NYSE:SPY), for example. If it were impossible to identify these periods, that observation might be vain; however, investors can spot abnormally high market valuations -- the late 1990s offered the most glaring examples -- by referring to Shiller's cyclically adjusted P/E ratio and Tobin's q ratio.
Is buying the U.S. market for the long run still viable? In a related development, did we just see the death of blue chips?
Saletta: I believe that dollar-cost averaging into the U.S. market is still a viable long term strategy. That being said, if it isn't over already, I think the era of the U.S. being the world's sole economic superpower is rapidly drawing to a close.
As a result, I'd be looking to capture some of the better long term growth prospects available elsewhere. I'd prefer to build an index-based dollar-cost averaging portfolio on a platform with a little more global exposure, like the Vanguard Total World Stock Index ETF (NYSE:VT), over a U.S. only fund.
As for blue chips, they're not dead, but they have lost their aura of invulnerability. Profitable ones with strong global presences and solid balance sheets, like Microsoft (NASDAQ:MSFT) (which I own), should turn out just fine. It's the ones with heavy debts and anemic operating strength that may not recover all that well.
James Brumley: The phrase "this is a stock picker's market" is thrown around in a bear market more so than during a bull market, but my experience has been that it's always a stock picker's market no matter what the environment.
With that as a preface: Buying into the U.S. market for the long haul isn't viable the way it was formerly assumed to be. However, our equity market still offers great investment opportunities for those who seek them. As for the so-called 'blue chip' stocks, they didn't categorically die in this recession any more than any other sized stock did.
No, the only death we witnessed was the end of the assumption that any company is 'too big to fail'. Do we need to look any farther than General Motors or AIG (NYSE:AIG) to find an example? It was a good death though, since it will force investors to assume nothing, and watch everything.
Louis-Charles: The U.S. market is still viable for the long run on a stock-by-stock basis. However, U.S. equities and blue chips, as a basket, will remain materially impaired for the foreseeable future. That being said, I believe the opportunities to diligently search through the rubble and find market beating small and mid-cap companies are near limitless for the disciplined, small investor. Small is the new blue!
