Is Buy-and-Hold investing strategy dead?

Apr 20, 2012

In this issue:
» Governments should leave businesses alone
» India Inc far too pessimistic, feels ITC head
» The biggest problem with the US
» Is the worst of the financial crisis yet to come?
» ...and more!

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Economists, it is said, suffer from what has come to be known as Physics Envy. The reasons are not that difficult to find. In Physics, it perhaps takes just 3 laws to explain 99% of the data that comes our way. But in finance, the case is exactly the opposite. Even 99 laws may not be sufficient to explain just 3% of the data. What this essentially means is that there is no single path to financial nirvana. Then there is the added complication of a strategy losing favour with investors just because it has tended to underperform for a short period of time. Like how it is happening with the strategy of buy and hold investing. In fact, such has been the disillusionment of certain market pundits and articles with the theory that they have openly started sounding the death knell of it. They argue that volatility is too significant and hence, any asset class can suddenly become much more risky. Buy and hold doesn't work anymore, they hasten to conclude.

Does the above conclusion hold any validity? We certainly don't think so. The opponents of buy and hold strategy seem to be taking too generalised a view of things. They should know that not all stocks are candidates for buy and hold investing. The ones passing the test of sound business model, strong financials and attractive valuations are the only ones that qualify as buy and hold candidates. And such stocks can be bought at all times, irrespective of the kind of environment. Secondly, volatility in share prices should not be confused with volatility in underlying business. A lot of times there seems to be a great degree of disconnect between the two. Like for example share prices can be volatile even though the profits of the underlying business are growing year after year. Thus, classifying such a stock as volatile completely misses the point. To conclude, we believe that in a sea of irrationality that is finance, buy and hold strategy of investing in good business models at sound valuations and staying put as long as the fundamentals justify the same is amongst the most rational strategies out there. Terming it as useless based on generalised assumptions and few years of underperformance is akin to doing great disservice to one's investment returns over the long term.

Do you think buy and hold form of investing is dead or is very much alive? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
With a slew of IPOs hitting the Indian markets in quick succession, one would be tempted to assume that life has indeed come back into the struggling primary markets. Especially after what was on offer in FY12, one of the worst fiscals for IPOs in recent times. As today's chart of the day shows, money mopped through IPOs in FY12 was a mere 17% of the year before i.e. FY11. This makes it the second worst performance since FY05, trailing behind only FY09 when the Lehman crisis took the wind out of the sails of the IPO market. With FY12 off to an encouraging start, investment bankers and firms would be hoping for a much better year this time around.

Source: LiveMint

Sociopath is a term used to refer to someone with a personality disorder who completely lacks in conscience. Such anti-social people have no regard for the welfare of others and display an inability to conform to societal norms. You may be wondering why we talking about sociopaths? Well, just imagine what could be the consequences if a country was run by the kind of people described above. Even worse, imagine if that country was the most powerful country in the world. If a certain Doug Casey is to be believed, the US seems to be run by sociopaths.

The current economic and financial crisis that the US is facing is no random accident. The root problem is the country is being governed by a wrong set of people. The sad truth is that major institutions of the US are being driven by people who could be characterised as sociopaths. The rot has seeped into the system very deeply. Only some big disasters would be able to topple the existing order. Not only the US, but the entire world has to be prepared for some really big upheavals.

Has the investment climate in India deteriorated significantly? Well, that's not the case according to Y.C. Deveshwar, Chairman of the tobacco and FMCG firm ITC. He insists that corporate leaders in our country have talked themselves into a slowdown by sounding negative about the economy in various media. He believes that sentiment helps drive economic growth. If business leaders were optimistic about India's growth story, then things may not have been this bad. There are very few countries in this world that are growing. The current growth rate of around 7% is significantly higher than most developed nations. Only a few countries like China, Indonesia and some African country have a growth rate of 7%. If we don't invest in the land of opportunity, we may soon miss the bus.

With the Greece debt saga calming down through stimulus packages and austerity measures the world economy heaved a sigh of relief. It was believed that the debt pain has succumbed and global financial crisis is on the verge of an end. However, it seems that the worst is yet to come. And this is reflected in a sudden jump in credit default swap (CDS) prices on bonds of 15 European governments. For starters, CDS is like an insurance against default on bonds. The party who purchases the protection for default pays a premium to the counterparty. And if the bonds fail to make periodic payments as planned, the protection buyer's loss is made good by the counterparty. A sudden jump in CDS prices reveal that the price for protection against default has increased. This happens when the quality of the underlying bond deteriorates. And this is a sign that the bond might default. Now, it is believed that if these virtual defaults materialize, it could plague the entire world economy. Unless European Union bails out the troubled member countries, another crisis is perhaps waiting at the doorstep.

Ok, issue after issue of the 5 Minute Wrapup has tried to put forth the frustration of tax payers. Their agony with regard to the government's misuse of fiscal funds in bailing out less deserving entities cannot be emphasized enough. An article in Economist, has hit the bull's eye in suggesting a simpler solution to the problem. One that not just applies to the Indian government but to those across the world. Governments should refrain from meddling in the affairs of corporate. Leave the entrepreneurs to themselves and they can create another industrial revolution of sorts. Whether it may be use of technology or outsourcing, businesses are best placed to figure out the most cost effective model for themselves. No amount of governance can stop companies from making their processes most tech intensive. Nor can any government completely ban outsourcing. However, the third industrial revolution seems to suggest focus on sophistication and designing. Here again, cost saving may not be the only or prime motive. Governments cannot and will not be able to decide what is best for corporate. Hence, they should just stick to building better education system for a more skilled workforce. We completely agree with this. Unfortunately our own Right to Education Act, despite its noble intents, does not seem to cater to this need.

The hedge fund industry had come under fire during the crisis of 2008. The crisis and consequent increase in regulations had put the future of the industry under a cloud. Many market experts doubted that the hedge funds would be able to replicate their skyrocketing performance. In fact several thought that the industry would wither away. For those experts, the reality would come as a bit of a shock. The assets of the global hedge fund industry have grown to nearly US$ 2.13 trillion. Of this nearly US$ 700 bn has come into the industry since 2008. And this is despite the fact that 2011 was the second worst year of performance for hedge funds. The combined loss was around 5.25% on account of a worse than estimated Euro crisis.

A big reason for the surge in the industry is the changed focus of most hedge funds. They are now concentrating more on the so-called value strategies. These try to profit more from pricing anomalies in the stock markets rather than on the direction of the markets. They seem to have finally realized that calling the bottom or predicting broader markets cannot be the strategy for making money in the long run.

Meanwhile, indices in the Indian stock market have been trading lacklustre today with the Sensex down marginally by 20 points at the time of writing. Heavyweights like RIL and ICICI Bank seemed to be driving most of the decline. Markets across Asia closed mostly weak today whereas Europe has opened on a strong note.

 Today's Investing mantra
"The single greatest edge an investor can have is a long-term orientation." - Seth Klarman

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4 Responses to "Is Buy-and-Hold investing strategy dead?"


Apr 25, 2012

Buy and hold strategy certainly can't be dead. However, given the current volatile nature of the market, one gets tempted to set aside a portion of the investment money to buy into stocks that have temporary declines, make a quick 20-30% return within a span of a quarter or half year, and plough the profits back into Value stocks.



Apr 21, 2012

I just share some pesonal facts -
As employee of Lupin received 100 shares after applying through company loan in 1994.Cost 11800.10 rs.n 118 rs.premium.
Received bonus 2004 n then recently split made it 1000 shares.CMP 550.


Vinod Sajnani

Apr 20, 2012

On the lighter side, if Buy-and-Hold investing strategy dies, many of the analyst will lose jobs and and research agencies will close down. On the serious note, this strategy is essential to map the company's operations and performance with the investment fundamentals. It not always true that the stock that give better returns, is result of fundamentally strong company. Investing strategy can only differentiate the good bad and ugly for the interest of investors.



Apr 20, 2012

Yes, as on date the "Is Buy-and-Hold investing strategy dead?".... rather completely DEAD. see how the story of Gas find in KG-6 Basin shot up the Reliance Industries Ltd., stock many folds to achieve a target of 3000+, but after 1 to 1 one bonus even the half of it has eroded badly in just 2 years. The stock which was around 1100 after the bonus is now around 730 almost a one third loss and the results today show a further fall in the coming days, may be RIL is fairly valued at around 500 before the end of May. So far RIL has been gaining only because of the Govt. giving out huge sums of money running into thousand of crores as subsidy to OMCs' (oil Marketing companies) for the short fall in their realizations. But how long will the Govt. keep on playing with the Tax payers Money. We need to shut down the loss making National Carrier AIR INDIA, in lieu of funding there losses year after year. US was much wiser when they closed down PANAM. We must follow them right now, instead of bailing out AIR INDIA. Likely, the re capitalization of Banks is un warranted... why should the Tax payers bear the losses made by the Banks because of there lazy and High headed staff. All nationalized bank in India are highly over staffed and also inefficient staff which need be given voluntary retirement with immediate effect. The figures of IPP are all manipulated by the Govt. to give a wrong impression overseas to get FII make investment or FDI coming into India. All this is hot money and can ruin our economy in the long run. The major boost is required to be given to our exports to make the country surplus in Forex, as even on to date our imports are some 30% more than our exports, leaving a big gap in our forex reserves, which is bring covered by FII, FDI & NRI remittances. Govt must wake up in time, before we meet the fate of Greece, Spain or Portugal

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