this Charlie Billelo insight validates the Buy and Hold stay the course mantra.
...he goes on talking about how an investor putting money into the stock market in July 2001 faced a decade long of going nowhere then BOOM the next decade, the investor makes up for all the lost time. So Buy and Hold for 20 years pays off.
To which I have this to say:
1. Its a no brainer that over a long period of time, it pays to be in the market.
So stay the course, right? Not so fast.
2. First, that the S&P500, do you still see Nokia there or GE making any large influence on the market? Or even the dot.com poster child Cisco? Right, it is the stock you hold that matters, not indices. Unless you buy index ETF.
3. Second, where are we at now at the cheap-expensive pendulum? I think you'd agree it is expensive , though I'd say highly expensive. People say buy stocks of great companies like Apple etc. Sure, Apple is a great company but you are buying its stock and while great companies are good buys they are not necessarily so if they have way over the top share price that is priced for perfection. Remember, the company can be great but you are buying its stock. Would you buy a standard Mercedes for $500k? Buying to Hold when the pendulum is at Very Expensive is asking for trouble...how much more Very Expensive will get more expensive....how far more can a stretched rubber band stretch before it splits or snaps back?
4. Buy and Hold when it is at Peak or near Peak is using up your ammo which you could better use when the market eventually caves down. You have limited flexibility.
5. As for Charlie's portrayal, who will stay the course for over 5 years let alone a decade long, before declaring I no longer want to be in this market. Very few would stay the course over 20 years not tinkering, many would start to sell once they break even after that long 10 year wait of being underwater. That is simply human psychology.
6. Finally, what about opportunity costs? Making zero or negative returns over 10 years and especially when overweight in stocks is assuming that the $ could not be better deployed elsewhere making better returns when equities is in doldrums? E.g perhaps Gold would make 2-3x fold gain over the next 5-10 years while equities give barely any return over that timeframe once mean reversion sets in.
7. But of course, there would be a few number of companies that go on to become a great star of tomorrow, a handful that would gain multi-bagger status over time. Not an easy feat to find them but even when found , not an easy feat to stay the course with conviction in the midst of all the market turmoil that occurs during the meantime. But to make great money on these, you have to be invested rather heavily and not blink in the midst of market turmoil, but also prepared to lose it all if that great hope fails to deliver for whatever reason, sometimes through factors simply uncontrollable.
We have reached a stage now that Value stocks are fully valued , tech growth stocks facing growth headwinds and there is no market breadth....and while we still have ample liquidity searching for a home, finding profitable trade amidst uncertainty and increasing whiplash market environment is tough and frustrating and counter-productive. That one step forward two steps back , before we face many steps back. Given this, surely this is far from an ideal Buy and Hold environment except for those who must think that finding a home for cash in equities even in a volatile risky market environment is far better than maintaining cash to be eaten by inflation over time. Except that in whatever remains for the market, it is more likely at best a Traders market who are nimble enough to take advantage of very short term opportunities in very selective way and quick to get out of harms way in time. But trade longer, they too would be caught..
