Buy and Hold Strategy - Pros and Cons

The so called buy and hold strategy has been popular for amatuer investors or those looking to park some money into the stock market believing that in the long run, they will have greater return on their investments than other asset classes such as property, government bonds or term deposits. There are various indications that show that this is in fact a failed strategy as investors who adopt this will be worse off.

Here is a list of arguments both for and against the Buy and Hold Strategy summarized from the book by Leslie N. Masonson

Buy--DON'T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk

For:
1. Stocks perform better over the long run compared to bonds, treasury bills, cash and is the only way to beat inflation.
2. A diversified portfolio of stock, bonds, mutual funds will provide positive return over the long term.
3. It is better to stay in the market all the time since no one can predict up or down.
4.Stock market always recover and go to new highs, so it is better to be patient and stay with it.
5. If investors miss the best rallies, they will miss out on the best returns so it is better to stay invested in the market.
6.Picking high and low points to sell and buy does not work, so might as well stay invested and also to avoid frequent buy or sell commissions.
7.Only commission is the initial purchase so better to be invested for the long term.
8.Buying no load active and / or passive funds does not incur commission.
9. Rebalancing a portfolio annually to achieve a certain stocks to bonds ratio yearly is good. There are no tax consequences if this is for retirement account (for US holders?).
10. Tax only need to be paid when stocks are sold. For the case of mutual funds, they do pass on capital gains yearly and investors need to pay some tax on this. This is more relaxed for retirement accounts. (for US holders?).


Against:
1. Sometimes may take up to 20 years to break even since there is usually bear market in this time frame. Historically some 20 year period may return negative after inflation is accounted for.
2. Exposed to bear markets and crashes. If you just buy and hold, you will lose what you have gained and need to wait for the recovery.
3. From 1998 to 2009, buy and hold strategy did not return positive return after inflation is accounted for.
4. Diversification may not help as some bear market or crashes affect all industries.
5. There is no defense in a bear market. Buy and hold is only effective during a bull market.
6. Missing out on strong market rallies is not as bad as avoiding the worst daily, weekly drops in the market. Movement of prices in a crash is much more severe than in a charging bull market.
7. Commissions on buying and selling stocks have dropped. ETFs in particular allow exposure to diversified set of stocks.

CANSLIM method - William O'Neil

This is a quick review of the CANSLIM method of stock selection or stock picking as described in the book by William O'Neil:
How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition


The interesting thing I found about this method is that it is neither pure fundamental nor technical analysis but a combination with elements of both. Here is a quick brief on who William is.

William J. O'Neil (born March 25, 1933) is an American entrepreneur, stockbroker and writer, who founded the business newspaper Investor's Business Daily and the stock brokerage firm William O'Neil + Co. Inc. He is the author of the books How to Make Money in Stocks and 24 Essential Lessons for Investment Success and is the creator of the CAN SLIM investment strategy. He holds one of the highest performing track records in the stock market --- Wikipedia

Now on to the CAN-SLIM method. This article is not a book review, rather a summary of the CAN-SLIM method for quick reference for users of this blog.

C - Current quarter growth 30%- compare to last quarter, for four qtrs, sales growth. This indicates strong short term growth. Finding such a criteria for stock whose price has not shot up may be good as this may indicate a company which is overlooked and ready for appreciation.

A - Annual earnings growth 25% - last three years. Roe > 17%. Check earnings stability, i.e. this ensures that good earnings is not just a fluke, but is due to good business and can be sustained.

N - New things in company, products, management - fundamental. New highs off properly formed bases, such as stock price shooting up recently from a long inactive period.

S - Supply an demand. Low debt to equity. These are typical fundamental criteria. The first represent the core of any business for without a favourable supply and demand, the business would not survive. The second is fundamental on how the business is run in terms of debt level. Many large corporate failures can be traced to too high debt.

L - Laggards and leaders. Do not buy when price drop big, with big volume , even though look cheap. This will trap most amateur and even professionals like fund managers and so called fundamental investors. Get out of laggards if drop 8% or more.

I - Institution investors - buy stocks with a few institutional sponsor that have good performance, or more coming in. Avoid those with too big proportion held by institutions as this will lessen liquidity.

M - Market direction. Major top when small price up, large volume, big range. Market bottom begin with rally attempt which closes higher after day's decline. From fourth day, look for follow through with higher price and strong volume. After confirmed , buy quality stocks with strong sales and earnings . Also look for divergence in major indices and ratio of call to put options volumes.

A few more notes which I would try to remember for myself are:
- look for Cup handle pattern. This is when the stock price has not moved up or down for a long time and just recently starting to spike up.
- Buy when stock is going up, on increasing volume, not when going down.
- Buy companies with low debt to equity.