Thursday, June 25, 2009

Buy and Hold as a Tactic, not a Strategy

The latest confusion about the strategy of Buy and Hold investing seems to be coming from commentators that approve of buying and holding as an investment tactic. They argue (for the most part) that buying “good stocks” and then holding them for a long time is a time-honored investment strategy approved by the likes of Warren Buffet, and therefore they argue that Buy and Hold should be allowed to live. The two pieces I’ve seen were written by a sell-side analyst at a brokerage firm and a staff writer for a well known online investment advisory website, both of which are monuments to active management in their own way. How could writers and analysts who work for firms that give ongoing investment advice about buying and selling securities write pieces in favor of buying and holding?

The answer lies in confusing buy and hold investing as an investment tactic with buy and hold investing as an investment strategy. As a tactic, there is nothing wrong with buying good stocks and holding them for a long time. But I can assure you, Warren Buffet would never suggest that you should buy them based on their average returns over the past 50 years and then never sell them on the presumption that there is no such thing as an overvalued stock due to efficient markets. Buffett would conduct exhaustive research in order to conclude that a stock is “good” (offers good value) and he would most assuredly sell it if he thought it was overvalued. In short, buying and holding is an excellent investment tactic, but it shouldn’t be confused with the Buy and Hold investment strategy.

Buy and Hold as an investment strategy remains a high-risk proposition that supposes that markets are never too expensive to own. The only time an investor should implement strategic asset allocation (i.e., Buy and Hold) is when markets are unequivocally cheap, which happens maybe 1/3 or less of the time. Other than that, a more active investment approach is called for. So the next time you read an article from an analyst at a brokerage firm, or a writer for an investment website, suggesting that they like to Buy and Hold, know that they really mean they like the tactic of buying and holding…..not the strategy. If they really believed in the strategy they would both be out of business.