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Buy and Hold: How to Perpetuate Your Investment Losses
By Ulli G. Niemann
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A recent cartoon in my daily newspaper showed two guys sitting in a bar. One is
saying to the other: "I did learn something from my broker...how to
diversify my investment losses." While
this struck me as funny, there is certainly an element of truth to it judging
by the number of tragic e-mails and phone calls I have received over the past
couple of years.
This was brought home even more so by a reader who responded with strong
disagreement to one of my articles. I advocate a methodical, disciplined
approach to investing in no-load mutual funds. It keeps me invested during up
markets and on the sidelines during down markets. It was exactly this approach
that got me and my clients out of the market in October, 2000 and put us back
in to take advantage of the April, 2003 upswing.
Judging from the reader's e-mail it appears that he works for a major bank and
is adamant about Buy & Hold and Dollar Cost Averaging. Maybe it's the
approach he has chosen and he doesn't like hearing that the emperor is wearing
no clothes. Nothing personal, honestly, but I find it incomprehensible that
anyone, after the bear market and the financial disasters most people
experienced, can even consider such theories. The results are just too black
& white.
Here are his three main points:
1. "There is no real feasible way to know whether the market is going to
be up or down and when exactly to invest.
2. "The only logical way for an investor to make money is through the buy
and hold approach. This method is used by Warren Buffett and he has
consistently beaten the best with an average annual return of 29%.
3. "Dollar cost average helps to hedge against the ups and downs of the
market; moreover, one should have been buying up stocks during the last 3
years, though I do agree with your cashing out at in 2000. I do not wish to
insult you, but that seems to me more luck than intuition."
It appears that the only thing that I can agree with him on is, as he says,
there is no reasonable way to "know" whether the market is going to
be up or down. However, this statement also underscores that he is not familiar
with trend tracking methodologies and the idea that one does not need to
"know" or "predict" in order to make profitable investment
decisions.
I've put together the composite for my trend tracking index in the 80s and it
has consistently served me and my clients well by getting us into and out of
the markets in a timely manner.
The reader cites Warren Buffett's success. Sure, he is legendary, but remember
that he made most of his fortune during one of the greatest bull markets. He is
probably now considered beyond good and evil. But what about the numerous
stories in the press over the past 3 years of the heavy losses he sustained in
Coca Cola and other stocks, by stubbornly holding on to this positions. When
you have enough money invested in a wide range of holdings, you become almost
bullet proof. Do you fit in that category?
Furthermore, Buffet has resources available that the investing public simply
does not have. Saying that he is successful only because of his buy and hold
approach, and everyone following this technique will be too, is an
oversimplification and does not factor in all the issues.
How many non-millionaires have enough spare capital to keep buying and holding
and buying some more while stocks plummet? How long can they wait for the
upswing when their cost-averaged holdings will start to show a profit? Do the
math! Yes, the market will eventually turn up. But will it recover enough fast
enough to reverse your losses in time to do you any real good? If you're 20,
then maybe. If you're 60, who knows?
I have received countless e-mails and phone calls from individuals who have
been led astray by brokers, financial planners and others using buy-and-hold
and dollar cost averaging. Stories abound of retirees having to go back to work
just because someone told them that "the market can't go any lower"
or "let's dollar cost average."
As for his last point, when I gave the signal to cash out on October 13, 2000,
it had nothing to do with either luck or intuition. I had no clue how good of a
call that would be; I simply let my indicators be my guide. They pointed to a
sell, we considered, and then followed through based on our experience. We held
true to our philosophy and kept our emotions, speculations, fears or greed out
of the equation. This disciplined approach is what I advocate.
This year it has led us to buy back into the market on 4/29/03. And my detailed
analysis and evaluation of a range of funds led us to select some of the best;
my top fund being up some 50%. So, not
to be cynical, but to me dollar cost averaging is just a way to spread the pain
over a longer period of time and to cloud the obvious with the hope the market
will turn around tomorrow. After all, it can't go any lower. Can it?
© Ulli G. Niemann
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Ulli Niemann is an investment advisor and has written about
methodical approaches to investing for over 10 years. He
avoided the bear market of 2000 and has helped countless
people make better investment decisions. Subscribe to his
free newsletter: www.successful-investment.com
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