Subscribe3 Reasons to Stay in this Market ???
December 8, 2008 2:05 pm
It is as good as any headline looking to catch the attention of anyone who is grasping for reasons to stick to a plan that caused major financial (and psychological) pain over the past 12-months. The concept of Buy-and-Hold, the brainchild of Warren Buffett, has been bastardized by the asset gatherers who believe that it really means: buy-and-hold-no-matter-how-much-money-you-lose. (Also see Don’t buy and hold a bad Strategy)
When is it the right time to sell anyway? 10% down? 20%, 30%, 40%, or 50% ? While Warren Buffett has amassed a fortune by sticking to what he knows and believes in, he has also lost an amazing amount of money over the past 12-months. Of course I will not start to second guess his success, but should he be blindly followed by Joe Investor?
This week, MSN Strategy Lab brings the debate front and center as I reflect on the past few month’s market devastation and the process that was used to keep our Strategy Lab portfolio out of danger. Now up over 13%, I ask the question as to how anyone can just sit idle and watch profits and principal disappear.
On the heels of that commentary, Guru investor John Reese came to the defense of his unique computer driven methodology which combines the best ideas of famous investors. In his words:
They are those who have the best track records of outperforming the market over the long term — people like Warren Buffett, Peter Lynch, David Dreman, John Neff, Ben Graham and Martin Zweig. And what a lot of investors either don’t realize (or simply ignore) is that several such Wall Street greats have either written or been the subject of books that detail their stock-picking methodologies.
Many relied on quantitative, stick-to-the-numbers approaches, and I have used these proven and published techniques to develop my “Guru Strategies.” Each of these computer models mimics the method of a different investing great. During Strategy Lab, I’ll use these models exclusively to decide when to buy and sell stocks.
I like John and think he is an excellent money manager and a really smart guy. This is in no way directed at him, but his article got me thinking. It is odd that the defense of a buy-and-hold strategy always targets the fears of an investor missing the biggest days in the market and has at its root the idea that it is all-or-nothing? In other words, it appears that the assumption is that if you do not buy-and-hold, you are going to be a market timer who is looking to tactically move in and out on technical signals.
I have questions:
- Why is it that research related to being invested during the worst days are rarely presented?
- Why is it that we have been coaxed into believing that investors and advisors are too stupid to see a train wreck or rally approaching and use sensible risk management and hedging to both gain and protect a life’s savings?
- Why can’t it be as simple as admitting that chasing the S&P 500 is a fool’s game?
- If you want to be the S&P 500, then index through ETFs and call it a day. Who needs anything more if it is that simple and a downswing of 20% or even 60% does not matter?
- It always comes back…right?
It is time to question the established rules as they have caused irreparable harm to the portfolios of many investors beyond any risk tolerance assumptions that were ever considered. Frankly, a portfolio that is down 10% or even 25% in a year’s time is difficult enough to deal with; but 50% in a matter of months is something that needs to be questioned.
Do you still believe that holding on to a portfolio in all market conditions is the right way to play this game?
It is time to stand up to those that profit off of the strategy and found it acceptable to removed the word “risk management” and replaced it with “just trust that everything will work out” in an effort to rationalizing the massive amount of money lost to absolute stubbornness.
I’ll take stop-losses and hedging any day of the week….
Thoughts?
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10 Responses to “3 Reasons to Stay in this Market ???”
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Andrew,
Thanks a million for the interesting and informative interviews, rants, and ideas.
Congrats on your Strategy Lab work, it’s a testimony to your discipline and knowledge of the markets.
1. You mentioned these “Lazy Portfolios”. Paul Farrell a Marketwatch.com “writer” is an advocate of these, yet he recently cited 30 reasons why there will be a depression in 2011, so how stupid would it be to have a lazy portfolio duh!
2. I would like to suggest interviewing Tom O’Brien of TFNN sometime. I have good success utilizing elements of his “Timing The Trade” approach along with your ideas and IBD. Tom has an excellent handle on the gold market too.
I totally agree with you Andrew – just wish you offered your investment product to people out side the US as I think there are many who do not have the time or discipline to be in the markets at this time (myself included)
Excellent website and podcast, Andrew. Following your advice, I have just moved all my retirement accounts over to Schwab so I can handle them myself. I have to be able to do better than 40% down! Thanks again for knowledge and opinions.
jeannie:
Be Disciplined!
:-)
Andrew
“Why is it that research related to being invested during the worst days are rarely presented?”
The companies and advisors who provide the research are biased. They only get paid on what is invested.
“Why is it that we have been coaxed into believing that investors and advisors are too stupid…”
I would substitute “ignorant” and possibly “lazy” for “stupid” and then the coaxing would have more validity. I firmly believe that people need to either take the initiative to educate themselves or do the due-diligence to find someone competent to do the work for them.
“Why can’t it be as simple as admitting that chasing the S&P 500 is a fool’s game?”
Well said! What does the direction of the S&P 500 have to do with me meeting my investment goals?
“If you want to be the S&P 500, then index through ETFs and call it a day.”
And you’ll outperform the vast majority of those money mangers (net of fees) who are benchmarked against the S&P 500.
“It always comes back…right?”
But will it come back in time for me to achieve my goals?
What is growth in a portfolio worth if you can’t protect that growth?
Can I do much more than “buy and hold?”
It is my experience that many “average” investors seem to have most or their savings tied up in their employer’s 401ks. Unfortunately those 401ks have very real limitations. What will it take for investors to have more than just “buy and hold” options in their 401ks?
I have seen many 401k accounts and the vast majority were very poorly allocated. I wonder how much better off those “average” investors would be if there were more choices, such as short ETFs or option contracts. Would they still use similar flawed criteria for making their investment decisions? Could more choices increase the potential for those same investors to do even greater damage?
Don’t get me wrong, I want to have additional investment options in my 401k. Heck, I even want the ability to manage my Social Security. Even though I worry about the majority of people who fail to educate themselves on how to be disciplined investors, I don’t feel that the rest of us should be penalized for their ignorance and laziness. We need real options! If we can’t have options within our employer’s 401ks, maybe we should be released from the shackles that bind us to those 401ks.
All my stop losses hit early on in this debacle, and I have slept soundly ever since. I had to fire my very fancy portfolio manager in New York to do it; when I contacted him in early September to put stop losses on our positions, he sniffed and said, “We don’t do stop losses.” So he lost his 1% cut of my portfolio, and– I hope–he’s lost tons of sleep.
Mary Ellen:
Classic..
Andrew
Andrew…. Warren Buffett does not advocate a buy-and-hold strategy. He advocates fundamental analysis, which is actually a different and far more complex trading philosophy. “Buy-and-hold” is a mickey mouse term and should not warrant the attention of any serious investor.
I do agree that if your broker uses those words you should fire him. But not because it is wrong. Because it demonstrates a severe lack of investment education.
Thanks for sharing 3 reasons. They are really nice.