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When Buy and Hold is Wonderful

I really like these thoughts by John Hussman regarding the narrow view around buy and hold investing.  It reminded me of my post on the “Portfolio Manager Strategy Cycle” where buy and hold dominates everyone’s thinking near market peaks.

I recall back in 2009 when I was saying that buy and hold was not dead at all and likely much more viable than most were saying back then.  Of course, I also wish I’d listened to my own advice at the time as I’d be a much wealthier man today if I had.  Of course, I wasn’t a buy and hold investor in 2009 any more so than I was in 2007.  And my guess about the long-term directional trend was largely just luck.  But that misses the point.  In the following quote, Dr. Hussman discusses the importance of seeing the entire business cycle through and not falling for the trap of becoming too euphoric when things are good.  As he says, buy and hold is wonderful if you can overlook the negative parts of the cycle:

“There are actually numerous investment disciplines that I believe are effective over the long-term, including a buy-and-hold approach. The problem, in my view, is that investors constantly switch their discipline when it isn’t performing well at the time. Since 2000, a buy-and-hold approach would have required an investor to suffer through one 50% market loss and a second, distinct 55% market loss. Frankly, I think another one of a similar order will complete the present market cycle. Over the very long-term, buy-and-hold investors have done fine, particularly combined with good value-conscious stock selection. But the drawdowns can be intolerably deep from our perspective, and the full-cycle returns following points of rich valuation tend to be particularly disappointing compensation. I expect that this will be true over the coming decade as well.

Buy-and-hold has been wonderful if one’s attention is carefully restricted to the advancing half of the present, extraordinary, and unfinished cycle (or what is almost the same, the cycle-and-unfinished-half-cycle over the decade since 2003). Just as day follows night, buy-and-hold strategies reach the peak of their popularity at market tops, because those are the points where every effort in recent memory to sell or reduce risk has apparently failed. Conversely, buy-and-hold strategies are most reviled at bear market troughs, when the full weight of losses is felt. I have no argument at all with investors whose strategy adheres to a disciplined buy-and-hold, diversified across asset classes, over the full course of the market cycle. In contrast, I have great concern about investors who discover buy-and-hold at the top, and adhere to it only long enough to abandon it at the bottom. The most important part of a buy-and-hold discipline is the commitment to remain passive even as it experiences massive interim losses. Look, kid, I never said this was easy. The road to easy street runs through the sewer.”

Of course, it depends on what kind of buy and hold you’re doing, but the general message is important – don’t fall for the wrong strategy due to recency bias.

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