Strategy Lab / Round 1812/5/2008 12:01 AM ET
Is buy-and-hold investing dead or alive?
A little back-and-forth on tactics in this stormy market livens up a round in which some of our players have chosen to batten down the hatches rather than take further losses.
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Strategy Lab is MSN Money's stock-picking challenge. Six top traders run mock $100,000 portfolios for six months and document every move.
A market like this one makes all of us rethink strategy and tactics, and there's a bit of a debate going on right now about what might be the most popular way to invest: buy and hold.
But Thursday, in "3 reasons to stay in this market," Guru Investor John Reese offered a passionate defense of the idea of weathering the storm and sticking with your stocks.
Reese says those who urge you to time the market -- trading in and out based on daily ups and downs and a host of technical factors -- are simply ignoring the market's long history: "Stocks have had a terrible run and the economy is reeling, so now it's time to bid adieu to 2,472 months worth of history and start making long-term investment decisions based on what has happened in the past 12 months (and in particular, the past 60 or so days).
"Sound a bit drastic? Well, that's exactly what those who are attacking buy-and-hold as a long-term strategy are saying."
The core of the argument is that those who've already been pounded will lose again because no one can predict when the bear market will end. For example, say you decided months ago to get out and wait until the market rose 10% or 15%. You'd have already gotten back in a couple of times since on market surges, and lost even more.
Similarly, Reese says, when the market moves up at the end of the bear, it will move fast. And if you wait to buy stocks again until it's up 15% or 25%, you'll have missed a good part of the bounce back. You'll have lost again. Buy and hold will win in the end, Reese argues, because it always does.
"The bottom line: If the riskiest part of market-timing involves missing the turnaround -- and we haven't yet reached the turnaround -- how can market-timers now be claiming some sort of victory over buy-and-holders?" he asks.
"The answer is that they can't -- or at least they shouldn't. Someday, years from now, maybe market-timers will be able to lay claim to such a victory. But when they do, they'll have to back it up with long-term proof -- not one year's worth of crisis-driven data. And right now, that long-term proof just isn't there."
True, but the market is making a persuasive case these days against holding stocks long-term. The major indexes are trading below their levels of a decade ago, even when you count dividends.
Here in Strategy Lab, Disciplined Investor Andrew Horowitz took on buy-and-hold most recently in a journal we titled "Don't buy and hold a bad strategy."
More from MSN Money
Stock market (c) Getty Images
* Yazvinski: Bail out Playboy bunnies!
* Van Merteen: Hank, buddy, can you spare $700 billion?
* Kam: Banks may prove a drag on the economy
* Horowitz: Don't buy and hold a bad strategy
* Gold: It's time to drop a risky retailer
* Reese: 3 reasons to stay in this market
Taking on the experts who say that "anyone . . . under the age of 30 or so should look at these times as once-in-a-lifetime opportunities, with stock prices so low that buying now is a great idea," Horowitz suggests all strategies have their time -- and the time to buy stocks and hold them isn’t now.
He cautions again following the experts who believe you should hold on because "since the market has always recovered before, it has to this time."
But his real concern, it seems, is for those whose advisors told them to buy and hold, and who've since written him e-mails like this one: "My sister suggested I contact you. My investment account has lost an incredible amount of money and my 'advisor' is clueless what to do. I am down $385k from over $600k. Please contact me so that I can provide you with the information so you can review."
So which side is right in this debate? We wouldn't hazard to guess. There are too many factors at play for individual investors – including the question of how long you have until retirement -- for any one strategy to work for everyone in any market. But journals like these might help you decide which way to go, and having any strategy is better than being a victim.
Reese, of course, isn't a traditional buy-and-holder, anyway. He stays fully invested in stocks, but he retools his portfolio monthly according to his computer models of proven investing gurus. But he's been hurt this round by the fact he doesn't short stocks. (If you're wondering why you should pay attention to someone who's down so sharply this round, keep in mind Reese's three previous rounds. He gained 26% in 18 months, 24 percentage points better than the market.)
And Horowitz, who's our only player well into the money this round, isn't really a market timer, at least not of the whole market. He's as close to a day-trader as we've had in the Lab for a long time, and even more active in real life because Strategy Lab doesn't take trades intraday. He makes very specific moves where he sees opportunity, with a very tight eye on prices to keep gains and limit losses.
In fact, his gains thus far have involved more time and resources than most investors have at their disposal, and he know this. He's promised to offer over the next couple of weeks a guide to the same sort of active trading for everyday investors, something we look forward to.
Buying and holding, of course, is much simpler. And logic still says there are great companies worth buying out there for the long term. But, as they say, in the long term we're all dead; in the short term, everyone likes profits.
Into the portfolios
There haven't been many moves of note lately as, frankly, the Thanksgiving holiday seemed like a good time for a break.
Horowitz, who's mainly been minding his stop losses, is by far our leader with a 13%-plus gain -- a whopping 46 percentage point advantage over the Standard & Poor's 500 Index ($INX). On Thursday afternoon, his portfolio was down to four stocks, two up and two down.
Amateur Jim Van Meerten continues to hold the second position, 2% in the black. And he continues to write what we’re all thinking as we watch the Wall Street bailout unfold. His latest journal is "Hank, buddy, can you spare $700 billion?"
Skeptical Capitalist Vad Yazvinski holds the third spot in our race with a loss of 11%, thanks in large part to an interesting short bet -- he's gained 43% by shorting Ultrashort Financials ProShares (SKF, news, msgs), meaning he's actually betting on bank stocks to advance. He, too, has some interesting ideas on better uses for government largesse. Read "Bail out Playboy bunnies!"
News Hound Howard Gold and All-Star Team player Ken Kam continue to stand pat with losses of 16% and 20% respectively, basically waiting for a turnaround in their stocks.
And Reese, as we mentioned, continues to trail the pack. We always consider it brave for long-term traders to take on our six-month game. Here's hoping for their sakes -- and ours -- that the turnaround comes sooner rather than later.
-- By Ron Prichard, MSN Money
articles.moneycentral.msn.com |
