Is Buy and Hold Dead?

For the context of this blog posting, the term "buy-and-hold" specifically refers to an investment strategy whereby an investor buys equity securities with the intent to hold them long-term with the goal of realizing price appreciation. This is strategy endorsed and often utilized by historical investment icons such as Jack Bogle, John Templeton, Peter Lynch, and of course, the legendary Warren Buffett. Although, in the past few years, it appears Mr. Buffett has liquidated and converted to cash many of his holdings in various companies. The majority of professional participants in the investment world now believe buy-and-hold is basically dead and gone. I don't believe buy-and-hold is dead and gone, but it's definitely on life support.

One reason buy-and-hold has fallen out of favor is that the strategy implies the risk of assets is always justified by the reward. The idea that every year is a good year to own equities is patently false. The risk of buying and holding securities is not justified by the reward under certain conditions. Another problem with buy-and-hold is the implication that prices don't matter because the strategy requires you to buy-and-hold at all times regardless of price or valuation. Is there any other buying decision in your life where price doesn't matter? The answer to that question is glaringly obvious. Besides completely ignoring the essential investment concept of managing risk, buy-and-hold requires little intelligence, skill, or serious effort. Combined with the ongoing trend of passive investing, this is a recipe for disaster.

There are additional reasons why a buy-and-hold strategy, while not complete nonsense and outdated, is a risky endeavor these days. It totally misses the dynamic evolution of the world - everything changes throughout time and the speed of change is ever-increasing. The number of variables at play also is increasing at a geometric rate. Another risk is the reduced lifespan of a business, even originally successful businesses. The lifespan of large, publicly traded companies has significantly decreased over time, with some studies indicating a current average lifespan of around 15 years or less. More stocks have vanished or gone to zero than have survived to this day. One of the chief reasons buy-and-hold isn't king anymore is due to the new, more extreme conditions in the market. Although currently in hibernation, volatility and the Bear have not gone extinct. Through greed and lack of attention, our markets are sometimes built on inflated bubbles. I can make the argument that is presently the case. Furthermore, while timing the market to perfection is improbable, if not impossible, wise investors tend to reduce their exposure to stocks when the market is expensive relative to the fundamentals, and keep their exposure down - if need be, for years - until the market becomes much cheaper. It then involves increasing exposure, and keeping it high, again for years, if necessary.

As mentioned, the market is more dynamic than ever. Investors will miss out on gains from shorter term movements if they rely exclusively on buy-and-hold and do not hold capital for shorter term investments. Buy-and-hold is a purely offensive investment strategy that ignores the defensive half of the investment equation. At times it makes sense to take a short position in a stock. Warren Buffett was mentioned earlier. Probably no other investor has been more closely associated with buy-and-hold than Mr. Buffett. His baby, Berkshire Hathaway, has recently sold a substantial amount of stocks and is presently sitting on a record $325 billion cash pile as a result. Old Warren believes equities are severely overvalued and a market crash is possible. He is wisely waiting for bargain basement opportunities. This is not the behavior of a true blue buy-and-holder.