...it is easy for Buy and Holders seeing this to sigh, saying that market participants today have little patience and are gambling to get rich quick, in the old days, we hold and happy to see our stocks grow little by little steadily over the years.
...but the investing world has changed, and with that we need to adapt away from the one we were accustomed to.
...absolutely the share market today is one giant casino, market participants gamble under the guise of investing, you'd wonder if they know the difference.
...but there are many reasons why Buy and Hold no longer works in the new investing world and I have a few serious ones:
1. The investing world has become a far more dangerous one relative to the one decades ago - not just the high debt levels, but also the derivatives, option trading, leverage trading etc
2. In today's investing world, stocks rise significantly more, creating bubbles and consequent boom-bust and volatility episodes that we see all the time - i.e if you invested hoping for just 10% return pa and prepared to invest for 10-15 years, and you suddenly get a 200-300% return over just a year, wouldn't you sell? After all, you have achieved all that you wanted over 10 years in just a year! That said, I see all the time, people squander away that multi-bags because they never believe they could lose it all. People thinking that if they are up +500%, they could not lose it but all it takes is a -80% correction which eliminates all that 500% gain. And in the world of small caps, a -80% contraction is not uncommon.
3. I can't comment about management in the past decades, but in today's business world, CEOs compensation are strongly linked to growth and some CEOs rather take inappropriately unqualified or less qualified risks in making acquisitions to promote self interests, and 'screw' things up big time
4. You think you can ride the down cycles -i.e you didn't want to sell at the peak thinking it could go higher but when it didn't and start falling, you continue to hold to wait for the next cycle. But along the way after a longer than expected wait, suffering in silence, your company gets taken over at the low end of share price range and you lost all ability to recover over time, making it futile your wait. So many ASX software companies went down this way.
5. Social media has amplified risk positioning especially in the small cap space, so we see extreme exuberance at the beginning of the bull rally, but all too often market participants forget that at the end of the day, valuation matters and they typically do and come to mind when the share price starts falling in free fall fashion making lower lows. Once exuberance gets crushed, mean reversion process takes off in a hurry.
