What is the Buy and Hold Myth?

Did you know… In the year 2000, there were over 22,000 stock recommendations given by professional analysts? Yet Less than 60 of those were recommendations to sell. 2000 was a year in which stock valuations were setting record extremes and one of the worst bear markets in history years began. Why did so many professionals urge ordinary investors to continue buying even as their investment portfolios were being decimated? The answer to that question can be found in one of the longest running most pervausive myths in stockmarket history: the “buy-and-hold” myth.

The story every investor is sold by the so-called experts goes something like this: Build a diversified portfolio, then forget about it! Don't ever look at what is happening to it. Resist the temptation to peek or worse, to make changes. This, we are told is the only investment strategy the works. This we are told is as good as we can ever hope to do. This we are told is the only strategy that has any chance of “working”.

“It ain't the things that people don't know that's the problem. It the things they do know that just ain't so."” -Will Rogers

Let me ask you a question… When the market was tanking, who do you think was selling? The brainwashed investing public wasn't selling. The professionals were doing the selling. Yes thats right the very same “professionals” who were recommending we buy 22,000 different stocks, were selling those same stocks in anticipation of buying then back from you and I later at a lower… much lower… price. Now don't you feel duped by he guy who sold you the buy-and-hold myth?

Wallstreet pro's who universally advocate a buy-and-hold approach for you and I, never practice their own recommendation. While we are told to suck it up… they are quick to dump large blocks of shares when the market tanks. Yet Buy-and-hold continues to be touted as the “best” investment strategy of all.

Invariably the sales pitch goes something like this… Markets always rise over long periods of time, regardless of occasional bear market fluctuations. Nobody can time the market. If you had invested $1 in the Dow Jones in 1901 you would have tens of thousands of dollars today. If you missed just X number of the days on the market your performace slips to Blah… Blah… Blah… we've heard it all before.

“There is no sadder sight in the world than to see a beautiful theory killed by a brutal fact"” -Thomas H. Huxley

There are several flaws to the Buy-and-Hold salesman's myth. First, the Dow Jones index is not the same set of companies today as it was one hundred years ago, and in fact it has been “re-adjusted” many many times. Which means, you didn’t really “buy-and-hold,” rather your portfolio would have had to have been frequently adjusted along the way.

Second, who has 100 years to grow a portfolio? Most mortals have 20 or 30 years to invest at best. When we consider a more realistic time horizon, all kinds of risk enters the equation. For instance, had you started your buy-and-hold portfolio of technology stocks in March of 2000, you would have experienced such a crippling loss that you may not recover within your lifetime. The same experience could have happened in 1929, the early 1970’s, in 1987 and many other times in between. A bear market is a reality, one that can permanently cripple a buy-and-hold portfolio.

Sources of the Buy and Hold myth

Occasionally there have been some exceptional stocks that went way up in value. We all wish we had bought IBM in the 50's or Microsoft in the 80s or Dell or Cisco in the 90's. As the value of those stocks skyrocketed they help to perpetuate the the buy-and-hold myth. But for every Microsoft and Cisco and Dell and IBM there were hundreds of other stocks that went nowhere or even disappeared. Look at what happened to most of the “.coms” from the 90's… they''re gone, forever, along with the money that was invested in them. You can be sure that at one time each and eveyone of those now defunct stock were on some “professional ” analyst's buy recommendation list too.

The growth in the mutal fund industry has also fueled the buy-and-hold myth. According to the salesmen, we're suppose to pick a good fund and hold until we're ready to retire. This they say is buy and hold investing. But is it? THe fund manager is continually dumping losers and buying companies he/she thinks are good investments. So a mutual fund is not the buy and hold strategy it is claimed to be. Often, fund managers are required by law, as outlined in the prospectus you never read, to keep their fund fully invested. Also Mutual fund managers have a vested interest in you not selling your shares. The more money that there is in their fund, the more money they make in fees and commissions. Do you really believe the fund manager has put your best interest ahead of their own?

Yet another reason for the perpetuation of the buy-an-hold myth is generational amnesia. Until recently, most investors had never seen a bear market. The warnings veteran trader's, perhaps their grandparents, voiced about market uncertainty were chaulk up the the delusions of a rambling old man. To the younger less experienced indoctronated and brainwashed croud, Buy and hold is proven “workable”.

Buy and Hold Investing is…

CRAZY!