Is Buy and Hold Dead?

[natedredd10 10]

Regards a well diversified portfolio approach -well yes that will help spread the risk (not necessarily reduce it )

 

diversification is a good startegy on paper, but 30 years of everone knowing this strategy has wrecked it and essentially made all assets highly correlated.

Buy and hold though isn't dead..I think that is a very dangerous idea if your a trader.Average joe money manager has an almost impossible task. If he follows the optimal long term strategy he will almost certainly lose clients in the short term and kill his business.

People though seem to have a natural bias though when it comes to games involving minimax and "irrationaly" sway towards trying to the maximize gains.

Minimax - Wikipedia, the free encyclopedia

 

All you have to do long term is focus on not losing much and the gains take care of themselves, easier said than done though.

[james_gsx 16]

diversification is a good startegy on paper, but 30 years of everone knowing this strategy has wrecked it and essentially made all assets highly correlated.

Buy and hold though isn't dead..I think that is a very dangerous idea if your a trader.Average joe money manager has an almost impossible task. If he follows the optimal long term strategy he will almost certainly lose clients in the short term and kill his business.

 

I think another problem lies in how people "diversify" their portfolio. For example, buying SPY and AGG then calling it good (I have seen this). Or when shit hits the fan, they throw all their money into funds of hedge funds assuming those managers will take advantage of the volatility and provide a hedge - that doesn't work either. Or they buy a thousand separate companies and they can't possibly monitor the underlying business risk.

 

It's actually very easy to own several indexes (large, mid, small cap value, commodities, various fixed income, etc.). But you are right, assets are highly correlated now which brings up the question of how do you hedge? Even in a $6 million portfolio, you can't really go out and buy swaps. Treasuries tend to work, but as with anything else, how long before that stops working? You could use futures and options strategies, but then the fee needs to go up dramatically - and that would have to assume the model works in real life. That also has many legal and insurance obstacles.

 

Also, for the individual adviser, the life of his business relies on the clients he picks up. He has to be selective, and especially avoid the clients with the typical male ego. But to be completely honest, most people I have personally met with over $10mil aren't looking for 20% yearly gains - they want 5-10% (at most) with as little risk as possible. So the real key comes down to how you manage that risk.

[brownsfan019 17]

This is probably one of the better discussions around here lately IMO.

 

It's bigger picture stuff and it is a good thing to look at.

 

I think that as long as mutual funds and annuities dominate the investing landscape, buy and hold (or at least the idea behind it) will live forever. The funds and annuities spend way too much money to let the general public think otherwise & they spend way too much making sure Congress does exactly what they need.

 

So really buy and hold for many people is really just buying whatever funds their broker sells them. And holding them until the broker calls up and says let's make a change. Those funds may not be buy and hold directly, but the investor is buying and holding the funds.

[natedredd10 10]

It's actually very easy to own several indexes (large, mid, small cap value, commodities, various fixed income, etc.). But you are right, assets are highly correlated now which brings up the question of how do you hedge?

 

You don't....Hedging is a very strange concept when it comes to markets. The only guys that hedge properly I've seen are sports betters arbing out different books and straight up high frequency arbitrage..

If you aren't doing some kind of arbitrage, its ammusing to think that the perfect hedging strategy would simply eat transaction cost and be a -EV bet...

If I ran 6 mil I would have some kind of long/short portfolio that has a directional bias...the leg that is opposition to my directional bias would simply be to smooth out "being wrong"...Even then though there is a natural bias towards getting too fancy...I doubt that would be better than simply dollar cost averaging the most hammered asset on some time frame. OPM wise though thats not a very marketable strategy..."Tell you what I'm going to do...we are going to buy the shit no one wants for the wrest of your life and if done properly everyone you talk to should be beating you YOY performance wise."

6 million is still vastly liquid enough to not bring in 10 other dimensions to your analysis with derivatives.

Edited March 5, 2010 by natedredd10

[thalestrader 14]

I'm no expert, but is the age old "buy and hold" still good policy?

 

An active swing trading approach that focuses on the strongest stocks technically such as CANSLIM/IBD100 will out perform buy and hold in all markets.

 

Buy and hold is an approach that will basically match the performance of the general market within a statistical margin of error.

 

From the late 1860's until 1929, the general market had a slow but steady uptrend, and as a result, buy and hold was very rewarding. From 1929 through 1932, a terrible bear market, buy and hold was devastating. After the 1932 bottom until 1999, buy and hold was very rewarding, as again, the market was in a slow and steady uptrend. From 2000-2009, buy and hold was devastating, with very few issues showing a gain, and most showing major losses had they been bought and held through that period. From the 2009 bottom until - who knows, 2069 (your guess is as good as mine) the market will be in a slow but steady uptrend, and buy and hold will be wonderfully rewarding.

 

But, an active approach that trades in only the best issues (CANSLIM/IBD100) and goes to cash during cyclical bears will outperform buy and hold over the same period.

 

But I do believe it is likely once again safe to buy and hold. If the Dow and SP follows the R2K and Nasdaq Comp to new highs, I would consider my current opinion to be confirmed.

 

Though I am always willing to admit that I am wrong should the evidence of the tape prove me so. But right now, believe it or not (and I am having a difficult time believing it myself) we look to be in the next Big Bull.

 

Best Wishes,

 

Thales

[james_gsx 16]

You don't....Hedging is a very strange concept when it comes to markets. The only guys that hedge properly I've seen are sports betters arbing out different books and straight up high frequency arbitrage..

If you aren't doing some kind of arbitrage, its ammusing to think that the perfect hedging strategy would simply eat transaction cost and be a -EV bet...

If I ran 6 mil I would have some kind of long/short portfolio that has a directional bias...the leg that is opposition to my directional bias would simply be to smooth out "being wrong"...Even then though there is a natural bias towards getting too fancy...I doubt that would be better than simply dollar cost averaging the most hammered asset on some time frame. OPM wise though thats not a very marketable strategy..."Tell you what I'm going to do...we are going to buy the shit no one wants for the wrest of your life and if done properly everyone you talk to should be beating you YOY performance wise."

6 million is still vastly liquid enough to not bring in 10 other dimensions to your analysis with derivatives.

 

I agree with the long/short portfolio with a directional bias, and I would do something like that if I had $6 mil myself. But with OPM there are a ton of obstacles you need to confront (pretty much all compliance). Once you get through that, you have to actually hope the client is smart enough to realize what you're pitching him.

 

I like to buy assets that are out of favor, at least for a small portion of the portfolio. But when it doesn't pan out immediately the client thinks you're an idiot because their neighbor doesn't agree.

 

I used to think companies that managed over $100mil would be smarter with their asset management. I was pretty shocked to see some of their portfolios were nothing more than a ton of mutual funds and credit arb hedge funds. The clients were basically paying them for fancy reports

[james_gsx 16]

An active swing trading approach that focuses on the strongest stocks technically such as CANSLIM/IBD100 will out perform buy and hold in all markets.

 

But, an active approach that trades in only the best issues (CANSLIM/IBD100) and goes to cash during cyclical bears will outperform buy and hold over the same period.

 

Well the IDB index certainly outperformed the S&P 500 during the market crisis - that is, if losing money is your thing.

 

And the idea to go into cash during a bear market then start buying again in a bull market is about as fantasized as most economic theories. It sounds great, but how realistic is to implement?

[DugDug 10]

james - there is an interesting article under John Authers - the long view - in the Financial Times about stock picking and asset allocation. They mention a Robert Ibbotson and the Financial Analysts journal - his recent study adds a third factor into the debate between asset allocation and stock picking - market movement.

If you are interested it might be worth looking up as I just read about it on the back of the paper this weekend.

 

When it comes to diversification I I guess I should have specified it as blind diversification is not so good - ie; buying an index. I think James said it correctly having a simple model that you can adjust simply with the 70/30 split is always going to beat most markets,

( and I am sure most things will beat 90% of short term traders.)

 

As another point I follow a lot of long term trend trading ideas and models and this is definitely not buy and hold, however over the long term this outperforms most things - the issue here is - how long is the long term and how to deal with the drawdowns.

 

example; EMC classic is a fund that has returned CAGR = 23.2% over 25 years however they went through a period between 1995-2001 being underwater - very tough to handle.

 

In all these matters it is the long term compounding that is the vital element

[thalestrader 14]

Well the IDB index certainly outperformed the S&P 500 during the market crisis - that is, if losing money is your thing.

 

And the idea to go into cash during a bear market then start buying again in a bull market is about as fantasized as most economic theories. It sounds great, but how realistic is to implement?

 

 

You ought to read and understand O'Neil before you critique the approach. IBD's approach uses very specific criteria for quickly cutting losses, and very specific criteria for distinguishing confirmed uptrends from downtrends. And it will be no news to anyone who has been buyng stocks for more than 6 months that the leading stocks in a raging bull often lead to the downside in a rabid bear.

 

By the way, there are few things easier in life than distinguishing a chart where price is going from lower left to upper right from a chart that is going from lower right to upper left. While no one knows how long or how far a bull or bear swing will carry, it is nonetheless very easy to distinguish a bull swing from a bear a bear market.

 

How realistic it is to implement will depend, like everything in trading, on the individual and his or her discipline and ability to trade according to the plan rather than one's fear, greed, or desire to be right rather than flat.

 

Best Wishes,

 

Thales

[thalestrader 14]

When it comes to diversification ...

 

On diversification I agree with Gerald Loeb, and William O'Neils's formulation that "Diversification is an excuse for ignorance." Watch any bull market, and you will find that there are typically 1-3 sectors/industries that outperform by far the rest of the market. Why buy from under performing sectors just for the sake of being "diversified."

 

Gerald Loeb's recommendation was to "put all your eggs in one basket, but watch the basket"

 

Again, this all assumes someone wishing actively to watch his or her basket, which includes the ability to distinguish a chart printing price from lower left to upper right from one printing prices going from upper left to lower right.

 

Best Wishes,

 

Thales

[james_gsx 16]

You ought to read and understand O'Neil before you critique the approach. IBD's approach uses very specific criteria for quickly cutting losses, and very specific criteria for distinguishing confirmed uptrends from downtrends. And it will be no news to anyone who has been buyng stocks for more than 6 months that the leading stocks in a raging bull often lead to the downside in a rabid bear.

 

By the way, there are few things easier in life than distinguishing a chart where price is going from lower left to upper right from a chart that is going from lower right to upper left. While no one knows how long or how far a bull or bear swing will carry, it is nonetheless very easy to distinguish a bull swing from a bear a bear market.

 

 

I have read all his books, back in high school.

 

It worked great during the bull market. But even during the bear market they got chopped around between "buy" and "sell" - I remember looking at their paper and laughing since they couldn't make up their mind.

 

I'm sure it's a great philosophy for a small IRA if you have the time to adjust accordingly. But flip the tables to an asset manager with $100m under management, it's not such a great strategy. The idea also leaves out risk, and this might sound shocking, but most people don't want to take that kind of risk of holding 20 mid cap stocks and rotating every few months.

Edited March 7, 2010 by james_gsx

[james_gsx 16]

james - there is an interesting article under John Authers - the long view - in the Financial Times about stock picking and asset allocation. They mention a Robert Ibbotson and the Financial Analysts journal - his recent study adds a third factor into the debate between asset allocation and stock picking - market movement.

If you are interested it might be worth looking up as I just read about it on the back of the paper this weekend.

 

When it comes to diversification I I guess I should have specified it as blind diversification is not so good - ie; buying an index. I think James said it correctly having a simple model that you can adjust simply with the 70/30 split is always going to beat most markets,

( and I am sure most things will beat 90% of short term traders.)

 

As another point I follow a lot of long term trend trading ideas and models and this is definitely not buy and hold, however over the long term this outperforms most things - the issue here is - how long is the long term and how to deal with the drawdowns.

 

example; EMC classic is a fund that has returned CAGR = 23.2% over 25 years however they went through a period between 1995-2001 being underwater - very tough to handle.

 

In all these matters it is the long term compounding that is the vital element

 

I will check out the article in FT. We get the paper, so I will just ask my boss for his copy (that's if he doesn't leave it on my desk). Thanks for the heads up.

 

I think you hit the nail on the head with "how long is the long term and how to deal with the drawdowns." Certainly, if you hold everything during the drawdown, on the rise back up you will most likely have very good results. Even better, if you get out at the top and back in at the bottom like so many pundits claim is possible using their historical data then you will do even better. But it all changes over time, and that leaves out so many holes it's nearly impossible to implement in real time.

 

I guess you could ask yourself, "Do I want to own this for 3 years?" In which case, why not just own everything and buy beaten down assets? But of course, you have to expect some stuff to suck for longer than 3 years, and expect big drawdowns. You could always own the best performing assets, but chances are when those turn around you'll be holding a bag of junk. It's much easier to adapt to those changes on a few portfolios, but if you are an asset manager with $100m it's not quite so simple unless every portfolio holds the exact same thing. But then you also have to deal with taxes at the end of the year... and most clients HATE paying taxes so short term trades are typically frowned upon (which I will admit, is unfortunate)

[thalestrader 14]

I have read all his books, back in high school. I'll leave it at that.

 

No problem, that's what makes it a market. At least you admit that you are not qualified to pass judgment on the approach so others will know to investigate and decide for themselves.

 

Best Wishes,

 

Thales

Edited March 8, 2010 by thalestrader

[james_gsx 16]

No problem, that's what makes it a market. At least you admit that you are not qualified to pass judgment on the approach so others will know to investigate and decide for themselves.

 

Best Wishes,

 

Thales

 

I apologize, I thought this was a thread about buy and hold - not my personal critiquing of O'Neils books. If you would like, I can list out why I left his camp several years ago.

[thalestrader 14]

If you would like, I can list out why I left his camp several years ago.

 

You read O'Neil in high school. That is all I needed to hear.

 

One would presume that a discussion of Buy and Hold might benefit from a discussion of alternates to the approach.

 

Best Wishes,

 

Thales

[james_gsx 16]

You read O'Neil in high school. That is all I needed to hear.

 

One would presume that a discussion of Buy and Hold might benefit from a discussion of alternates to the approach.

 

Best Wishes,

 

Thales

 

Well I'm glad you pointed out other alternatives to the approach.

 

If I read O'Neil last month, would that make a difference? Or maybe since I've devoted my life towards this business I learned other methods that pulled me away from O'Neil? I've always felt canslim is a great gimmick to sell books and other services. But if the strategy makes you consistent money then I'm happy for you. Good to know some people can make money with it.