Friday, June 29, 2012

Buy-And-Hold Investing Is Not Dead ... Neither Is It Dumb

Currently almost all of the so-called "investing expert" pundits are virtually aligned against buy-and-hold investing. That's reason enough to believe otherwise, at least for me.

And that admittedly contrary approach is in large part attributable to the fact that short term traders and long term investors inhabit two completely different worlds.

And that's probably because the short termers live in an "investing" world of fast traders. Accordingly, they probably wouldn't even recognize a long term investor, since that's not their "game."

Buy-and-hold is mostly right sounds the right notes to me. That's why I wanted to share its contents with you:

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.
—Warren Buffett

In 2011, if you had an equity portfolio and left it alone all year, presuming you did not make any terrible mistakes, not trading was a great idea. . . .

2012 is proving to be much the same as 2011 . . . although I maintain that very well could change for the positive soon.

What we know about trading is that there are very few winners. While the best traders make a lot of money by beating most of the others (a lot like poker), there are almost no retail investors among the winners.

If you must trade, taking a slow-hand position-trading approach with companies and sectors that you have fundamentally qualified is probably the way to go.

Position trading is seeking to catch major moves over an extended period of time from a particular company or sector. Unlike active traders who are looking to move in and out frequently, a position trader who uses fundamental analysis in selecting companies and sectors will trade infrequently, only trading out when the major move has ended or market conditions become extreme.

Today, investors who are stuck in cash or bonds have a great chance to start fundamentally choosing stocks and sectors to buy and hold for a pretty long time. As Buffett has also said, "You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing."

Right now, I have a . . . pretty simple thesis:
  • An economic collapse is not imminent, the world economy already collapsed (2007-09, in case you missed it). What is going on now is the slow, painful, disgustingly frustrating and labored re-birth of the global economy.
  • The world is not done growing by simple virtue of the fact that there are billions of people who want better standards of living.
  • Scarcity will increase over the next two to three decades until sustainability models and alternative energy take hold.
  • Europe will gradually pull through (I'm tired of using the word "muddle" because so many people have adopted it) in an ugly, but fairly brilliant way, as they save the euro from attack by speculators and those motivated to blow it up for other reasons.
  • The United States will eventually do things right after trying almost everything else.
  • America is poised to boom as she is flush with many of the necessities of life, i.e. food and natural resources; strong in manufacturing high-end goods, i.e. machinery, medicine and technology; strong in skilled services, and very importantly, has a new large generation about to hit the workforce.
While rampant pessimism and fear exists among investors lamenting the past 12 years, that simply makes it a good, and maybe great, time to invest in stocks. The neat thing about mass investor psychology is that it offers some wonderful opportunities to go against the grain."

My Take

I'm actually pretty optimistic about the investing picture going forward. But I could be wrong, of course, especially concerning the very short term. To me, by the way, a short term investing time frame is five years or less.

Thus, for those who want to get in and get out at the right time, I'm not your guy. Not even close.

Even if we guessed right about the getting in piece, we'd still have to get lucky as to when to get out as well. Two-fers aren't good bets. Or if we were right about the getting out piece, then we'd have to be right about the right time to get back in, too. So my view is not to play if we're not prepared to stay.

Brains and Luck

The world is filled with smart people, for sure, but I don't know anybody smart enough to time market in-and-outs. The smarties may get lucky a time or two perhaps, but there's a huge difference between luck and brains. And nobody's consistently lucky. Correlation doesn't equate to causation.

Buy-and-hold investing is a great way to build long term financial stability and even create a little wealth while doing so. While it's very much a long term thing, that doesn't mean we can't enter or exit from time to time, depending on circumstances and especially our own.

Why So Optimistic in Such a Gloomy World? 

Well, there are at least two very good reasons for optimism: (1) energy independence is coming to America, and (2) reducing the size of government in relation to our economy is underway as well.

And most important, there is developing a widespread recognition, if not understanding, of the necessity of private sector growth, accompanied by deleveraging, in America and the rest of the world

Someday soon we'll confront our entitlement funding issues related to promised retirement benefits, including Social Security and medical care. 

And we'll also ask ourselves, at least rhetorically, why government bureaucrats are presumed to be better managers of our money than we would be.

And while we're figuring all that out, we'll be asking the same questions about how we spend our educational dollars as individuals and as a society, too.

Summing Up

In other words, MOM thinking will triumph over government knows best OPM. 

Just as we'll decide that being an owner is better than being a creditor. And that both are highly preferable to being a debtor.

That's just what I think, but I wanted to share those thoughts with you today. So I did.

Keep the faith.

Thanks. Bob.

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