Excerpt from David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service.
February 15-16, 2003 Weekend Edition
BUY & HOLD BASH
Brinker Comment: The U.S. stock markets are undergoing their second worst bear market of all time, both in terms of duration and scope The total return on the Wilshire 5000 since the highs in March 2000, is negative 43%. The S&P 500 is down 45% during the same time frame. Bob then went into his "permabull" rant noting that permabulls have continued to espouse their "buy & hold" religion. Bob queried what credibility the buy & holders could have when the market loses half of its value over a three year period. What investor would be willing to have a fully invested position fall by half in 3 years, and still believe in what they are doing?
We had a secular bull market that began in August, 1982 and ended for the Dow in January, 2000 and the other indices in March, 20002. It was a 17-1/2 year bull run and will be looked back as the "mother of all secular bull markets" where the Dow & S&P gained 1400% not even including dividends. During that time, people fell into the buy & hold trap. Investors saw 17 years of gains and concluded that investing was really easy -- all you need to do is put all of your money in the market and hold on. That is the buy & hold religion that led so many investors to take a fully invested position only to witness close to half of it disappear in a matter of three years. Bob thinks the "buy & hold" forever crowd is brainwashing. Does anyone believe in the buy & hold religion anymore? Bob licked his chops, ready to go in for the kill. If they do, they are being taught the buy & hold religion by false prophets!
EC: Bob loves to rant against the "buy & hold" crowd. I think he feels it makes for good radio. Unfortunately, I feel that Bob's discussion of this investing style is more akin to Jerry Springer, rather than to a serious discussion of the fascinating issues it raises. For example, there are probably thousands of academic studies comparing dynamic asset allocation methodologies, market timing, and passive investing. These are topics which I feel Bob should devote more time to.
EC#2: I have previously criticized Bob for portraying the buy & hold philosophy as one-dimensional. I think most individuals when they begin investing, utilize their employment retirement plans, whether it be 401(k), 403(b), or other related investment programs. Typically, you invest a certain amount of your paycheck each month that goes automatically into a mutual fund every two weeks, or every month, depending on how you get paid. For a long term investor, bear markets that occur during the early part of your investing career are actually a blessing, because it entitles you to accumulate stocks at lower prices. Bob's portrayal of simply "buy and holding forever" ignores the possibility that most investors change their asset allocation as they approach retirement, such that their portfolio is not mostly in stocks, and includes other asset classes such as bonds, REITs, etc.
EC#3: If Bob is going to lambast the buy & hold philosophy, and ignore these issues that I raise, at least he should discuss what the alternatives are. Someone should ask him what alternatives there are to buy and hold investing. Why don't they? WHY DOESN'T SOMEONE ASK BOB TO EXPLAIN WHAT HE THINKS THE ALTERNATIVES ARE TO BUY & HOLD INVESTING!
Caller: Bob, what are the alternatives to buy and hold investing? (they should hire me as program director) Bob's choice of words to respond to this question was interesting. Bob said the alternative is to practice "risk management." According to Bob, practicing "risk management" means that you will have "substantial cash reserves" during bear market periods which will cushion your portfolio's performance. It will also give you dry powder to reenter the market at a "more sensible" level than you had, for example, in the first quarter of 2000.
EC#1: I think it is telling that Bob avoids using the phrase "market timing" like its an anathema. After all, Bob professes to use market timing, his newsletter is called "Marketimer" and let's face it, his description of risk management is really a fancy way of referring to his market timing recommendations.
EC#2: Using "risk management" as a tool of asset allocation I have no problem with. Heck, I have been pretty much 100% cash since 2000! On the other hand, I find Bob's portrayal of his version of risk management somewhat disingenuous. For example, how did Bob practice risk management with his market timing. On the positive side, he recommended subscribers raise 60% cash reserves (later 65%), but then what did he do with the dry powder? Unfortunately, Bob recommending investing 30% to 50% of that dry powder into the QQQ if you were an aggressive investor, 20% to 30% into the QQQ if you were conservative investor. Is that risk management? Hardly. The losses in the QQQs for aggressive investors, almost completely nullifies the benefits of the tactical asset allocation recommendation in January.
EC#3: One final word on a "risk management" philosophy (market timing really). Let's face it, Bob makes his living from being a market timer. He isn't going to sell newsletters espousing a buy and hold philosophy. The question every follower of Bob needs to ask, is whether his market timing will pay off over the long term. So far, it has worked well during selected periods of time. However, his long-term track record of market timing still underperforms an unmanaged index fund. Stay tuned.
Caller: Are you only referring to individual stocks when you mention the "buy & hold" religion, or are you also including mutual funds under that umbrella? Bob said if it is a mutual fund investing in stocks, the answer is yes. Anything in the equity category. Bob noted that the buy & hold philosophy works during secular bull markets where you get tremendous run-ups over a long period of time. Most secular bull markets tend to produce gains in excess of 500%. This last secular bull market was an aberration in that the market produced gains of 1400%.
The caller then asked whether professional equity mutual fund managers get around the buy & hold issue by selling high priced stocks when they get too expensive. Even though they might tell you that, Bob doesn't think they have done that. Moreover, if you read the prospectus of these mutual funds, it requires many of them to remain close to fully invested at all times. Bob scoffed at the idea that a portfolio manager is going to be able to consistently manage your money, protect you in bear markets, and sell you out at the top.
EC: I wonder if Bob could see the irony in his last comment.
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DISCLAIMER: I am not associated with ABC Radio Networks, Moneytalk or Bob Brinker and this service is neither sanctioned by, nor written under the auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is not a substitute for listening to Moneytalk. It is only my interpretation and commentary of some of what is discussed on Moneytalk, along with additional educational information that I include, editorial comments about the market, helpful financial links, guest contributors and even humorous remarks. I also provide Special Alerts to my subscribers as part of my e-mail service and give them access to my web site, www.BeginInvesting.com. If you want to know what was actually said verbatim on Moneytalk, listen to the show live. You can even subscribe to "Moneytalk on Demand" which allows you to listen to the show in case you missed it live. The web site www.bobbrinker.com has all the links to the ABC Radio Network Stations that broadcast the show live and a link on how to subscribe to Moneytalk on Demand. The information contained in this e-mail is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security. This article is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright 2003 David Korn, L.L.C. |
