Buy and hold can be dangerous... - Views on News from Equitymaster

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Buy and hold can be dangerous...

Jan 7, 2010

...if it is intended to be 'buy and forget'! The two bear markets that we have seen over the past ten years - first at its start in 2000 and then near its end in 2008 - have demonstrated exactly how dangerous buy and forget can be. In the first bear market, which went on from February 2000 through September 2001, the BSE-Sensex fell 56%. In the second bear market, that began in January 2008 and seems to have ended in March 2009, the index lost almost 61%.

Such bear markets have left many investors reluctant to buy stocks at all. Some have even questioned the relevance of a 'buy and hold' strategy. They use arguments like -

  • "Point to point, markets haven't gone anywhere over the last three years!"
  • "I invested in tech stocks ten years back, and I am still sitting on some losses!"
  • "Realty and power stocks haven't made me much in returns over the past 2 years. Instead I'm sitting at a huge loss on them."

So, who is to blame for these investors' poor stock market returns?

Buying and holding such stocks for 2, 3, or even 10 years? Or buying and forgetting about such stocks and the mistakes made while buying them at very expensive valuations in the first place?

Ask yourself if the cases made above also relate to you in some way or the other.

Buy and hold is not at fault here. Buy and forget is.

Long-term investors can still take advantage of temporary panics and buy stocks from a 5 to 10 years perspective. They can still catch long-term trends that can power a company's stock for years. And this without being worried about catching the best or the lowest price.

But for them to be really successful, buy and hold needs to transform from 'buy and forget' to 'buy and review'. Even reviewing as infrequently as annually can help you maintain a good handle on your investments.

How to buy, and why review?
The buying rule involves looking for companies with a lasting competitive edge. A strong financial track record is also an essential consideration. Also consider whether the management is conservative and ethical or not. Finally, understand whether the company is able to identify long-term trends and ride them. If a company passes all these tests, you can buy into its stock.

As part of the reviewing process, try and understand whether the reason(s) you bought the stock in the first place apply anymore or not. A proper review process will help you decide whether to buy more of the stock, or maintain your current holdings, or even sell if the trend is about to go wrong for the company.

As Mr. Ajit Dayal wrote in one of his earlier Honest Truth - "Investing in shares is actually an investment in the underlying business of company. In the ability of the managements of those businesses to ride the company through good times - and bad times. Of course, you need to be careful that you don't end up investing in companies where the management starts riding a tiger of fraud and deceit - as Satyam shareholders found out."

Thus, buy clean companies, review them periodically, and if all is well, continue to hold them for the long term. That will be the ultimate way to your financial nirvana.


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4 Responses to "Buy and hold can be dangerous..."

mbersohn

Jan 17, 2010

There is no way that buying and frequent reviewing, even daily investigation, could have warned us to stay out or get out of Satyam. Fortunately that is an extreme exception. If each of our investments were 10% or less of the total then even a Satyam wouldn't kill us.

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Ramesh Rateria

Jan 16, 2010

I fully agree with the view that the purpose of the holding is important.For good companies with consistent track record,holding for longer period of 10 years may bear good returns.For short term holding, continuous monitoring and review must be done.

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S.RAMANATHAN

Jan 9, 2010

DEAR SIR,
Your view of buying and holding it for long time without review is bad.Good example is Satyam.In my opininon we have to review it at least once in three months though it is a good company, in the present environment. with regards,

Like 

k.sankaranarayanan

Jan 8, 2010

I fuuly agree to the views expressed and the rationale behind it.
Even a share which offers a very good value at the time of byuing can become less attractive if the price increase sharply.
Hence it is necessary to review the holdings periodically and seel , if the price runs up quickly.
Thanks & Regards,

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