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Buy and Hold: A Proven Failure as a Trading Strategy!

The crowds all bought into it. Buy and hold felt easy. Reality was different. Take this excerpt from the Wall Street Journal:

So how did buy and hold become such an unquestioned piece of received wisdom? Like just about any strategy, it worked when the market was going up. Stocks rose for such a long time that the buy-and-hold concept seemed flawless.

What is Wall Street’s never ending pitch:

  • Buy and hold for the long term!
  • Stay the course!
  • Buy the dips!

Problem? Buy and hold doesn’t work. Buy and hold is useless as strategy. Why? It never addresses the REAL issues for winning in the markets:

  • Buy how much of what?
  • At what price?
  • Hold for how long?
  • Do you ever sell?
  • How do you make money in a bear market?

Alternatives to Buy and Hold Futility

An excerpt from Todd Johnson in the Wall Street Journal:

I do feel that the buy and hold has been partially to blame for the investor losses. Warren Buffett says it is a buy and watch methodology that works. I do feel burned by the unaccountable and irresponsible comments that one must buy quality stocks and hold on (i.e., Cisco). Soundbites on [CNBC] allow an investor to hear a two-minute dialogue on why we must buy, buy, buy. This isn’t reality. Selling, holding bonds/cash are alternatives for cash preservation and appropriate portfolio management — not THIS IS A BUYING OPPORTUNITY — anytime stocks take a dip! Investing is an art. A science. Investing requires understanding the financial statements (i.e., balance sheet, cash flow statement, income statement), price/sales, price/book ratios, debt leverage, management changes, outstanding option dilution factors, etc. I never hear about these issues in the monthly magazines, CNBC interviews, etc. It is a must to understand the concept of investing.

TurtleTrader comment: Trend following never requires you to act as a drone and mindlessly follow tips from news personalities. Trend followers accept all blame for their trading, never attempting to shift the blame to others. Trend following does not require financial statements analysis. Balance sheets, cash flow statements, income statements, price/sales, price/book ratios, debt leverage, management changes are not used by trend followers. These factors are not relevant.

Another example from Barbara Trombetta, Fort Myers, Fla. in the Wall Street Journal:

A friend of mine has a standing order with his broker to ‘sell’ any stock in his portfolio that drops 15%. Now that, to me, is the smartest financial practice I have ever heard. I just wish he had told me about it years ago and not last year.

TurtleTrader comment: The 15% rule mentioned above is the start of a plan. It’s not complete. It doesn’t cover money management, but it is the start of an exit plan. Her thought at least acknowledges the futility of buy and hold.

Stocks’ Slide Ruins Older Americans’ Dreams?

Must we feel sorry for those sitting around casinos blowing money on games they can never win? What about the thousands of people that play the lottery day after day? Why must we feel for those that rode the bubble up and rode the bubble down with no plan? Consider this from the New York Times

To many Americans, the sustained slide in the stock market particularly last week’s nose dive has been something to fret about, a darkening cloud. But to many people at or near retirement age, it has been a colossal jolt. One 68-year-old man pleaded for anonymity as he told how he and his wife had sold their home in Manhattan and their beach house in the mid-1990’s, planning to retire on the income of about $1 million he invested in the market. As tech stocks rose, so did his portfolio. He hung on despite losing $4.5 million over two years. But last year, with some of his stocks reduced to pennies, and fearing that he would be sitting in the street, he and his wife took jobs at the Mohegan Sun casino in Connecticut. The market was going up so rapidly, it was easy to live off the appreciated value of your assets, he said. It was to some extent delusional, thinking this thing would turn around and come back, but it takes a while to come to grips with it. It hadn’t happened in my lifetime, that kind of demise. I was born during the Depression, but I wasn’t old enough to understand it.

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