Buy and Hold is Dead – Long Live Buy and Hold!

I have never been an advocate of buy and hold investing when it is being done on behalf of 85% of investors in a bull market. It gives the illusion of profits when every man and his dog are buying the same investments and just pushing up prices.

The only winners are those who sell out at or near the top of the market. At least they can book their paper profits as real profits.

The current market turmoil is testament to the serious problems with buy and hold in bull markets. It is a great story for the fund managers because it gives them funds to play the stock market with. In the early years of a bull market it makes good sense and buy and hold becomes a natural law of investing during this period.

I don’t call it investing though. It cannot be called that when many of the fund managers churn the stocks in their funds by 100% or more each year.

It’s not even speculating. I’m wondering if these guys used to meet for lunch and agree who was going to sell down a stock that day to allow another fund manager to buy it and then sell it at a profit.

At the top of a bull market buy and hold makes no sense. But when the market is down 50% or more and is likely to go down even more, buy and hold starts to make sense.

After a serious downturn in the market the upside begins to have a greater probability than the downside. That’s when buy and hold comes into its own. I said probability – not certainty. There are no guarantees here. You need to deal in probabilities if you are to begin investing in a chaotic market.

Right now some well-run companies are down 50% or more from their highs. We don’t know who the new market leaders will be but many existing good companies will make a comeback. They can be purchased for half their price of a few months ago.

The problem is we don’t know when the markets will turn to the upside.

In fact the probability is that the market may go down further, then flatten out for a while and eventually start a new bull run. This may be next year, in 5 years or even 10 years. Who knows?

Japan still hasn’t recovered. I believe they tried to stop banks and companies failing and have been going nowhere since the early 1990’s. That’s where the phrase, “capitalize the profits and socialize the losses” came from.

The difference is though that the US have this “fix it” mentality despite all the bailouts. They’ll get over themselves and bite the bullet. They will fix their financial system but it may take some time.

Buy and hold only makes sense if the markets are down significantly from their highs, which they are right now. Technical analysis is out the window as the massive market moves have messed up all the standard technical indicators.

Buy and hold makes sense if you are prepared to do just that right now with money you will not need for several years.

Buy and hold means NOT using stops losses (I know this may seem sacrilege). With the current market volatility its a fast way to the poor house. You need to be prepared to lose some money if markets go even lower but you need to sit tight and hold on – buy and hold.

Buy and hold makes sense now because I saw a headline on CNBC that Buy and Hold is Dead. That’s the contrarian trigger to consider using buy and hold again. Do the opposite of what everyone else is doing, as they say.

Dollar cost averaging also makes sense in this market. Even averaging down if you have to. Slowly averaging into selected stocks will pay dividends sometime in the future. Don’t expect instant profits though. Just try to purchase stocks in good companies and hold on.

The only question is what to invest in. Do you try to pick stocks that you believe will recover or do you go for an ETF of an Index and play a safer game.

Maybe you can do both and also buy an ETF that protects you against the market going lower.

Remember no one knows which stocks to buy, I don’t care how lucky they have been in the past. Sticking to companies with low debt may be a good idea to start with.

I am looking to invest in about 20 or so stocks in the ASX by using dollar cost averaging to get in a little at a time. Due to the high volatility I might take a weekly view of the stocks and add to them each week.

I don’t intend investing large sums of money all in one go. A little at a time will help me get a feel for what is happening in the market. There is nothing like having money on the line to focus the mind.

I’m not looking for instant profits. I am looking to position myself in good companies that will survive and thrive if I am lucky. I can be patient.

At the same time I am cranking up my technical analysis skills and software. I’m getting in training for when technical analysis will start to have relevance again.

Using technical analysis I expect to be able to invest in bullish stocks just like I did in March 2003. I expect I will use it to add to the stocks showing strength in the 20 or so I invest in initially.

Then I expect to use it to find other stocks as the technical’s improve.

Buy and Hold is only good to get you into the market right now buying “quality” stocks beaten down by market sentiment. Eventually when the bull market returns buy and hold will not be appropriate anymore as everyone will enter the market once again.

At that time there should be some profits in the stocks purchase months or years earlier. Once the stocks have a profit buffer, volatility seriously reduced and a bull market is confirmed it will be time to protected those profits with stop losses.

Buy and Hold is not an investment philosophy as espoused by the mighty wealth managers of the world. It is only a tool to be used at certain times in a stock market cycle. Just like market timing and stop losses are tools to be used at other times.

There are no rights and wrongs here. Each technique has its time and if used at the wrong time can seriously damage your nest egg.

Done right this could be a great opportunity to use money you have control of and do not need to live on, to recover money you may have lost in these markets.

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