|
Buy and Hold in the Dock
“Since its first publication in 1949” wrote Benjamin Graham, “revisions of The Intelligent Investor have appeared at intervals of approximately five years. In updating the current [1973] version we shall have to deal with quite a number of new developments since the 1965 edition was written. These include … a fall of about 35% in the price level of leading common stocks, ending in May 1970. This was the highest percentage decline in some 30 years. (Countless issues of lower quality had a much larger shrinkage) … [Other developments include the] bankruptcy of our largest railroad, excessive short- and long-term debt of many formerly strongly entrenched companies, … a disturbing problem of solvency among Wall Street houses [and] the advent of the ‘performance’ vogue in the management of investment funds, including some bank-operated trust funds, with disquieting results.” Not surprisingly, given the admirable results of his investment operations since the 1930s, Graham responded with equanimity to these developments. “The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate … We have not allowed these fluctuations to affect our general attitude toward sound investment policy, which remains substantially unchanged since the first edition of this book in 1949….”
Few of today’s market participants possess track records over the decades that are remotely comparable to those achieved by Graham and his protégés Warren Buffett, Thomas Knapp and Walter Schloss. Perhaps for that reason, few are as resolute in the face of today’s difficulties as Graham was vis-à-vis the challenges of his day. Accordingly, and perhaps as a result of today’s deep disappointments and steep losses, one principle which Graham commended to many investors – often oversimplified (and hence corrupted) by the phrase “buy and hold” – has recently been criticised and denigrated. Jim Paulsen, economist and chief financial officer of Wells Capital Management, for example, stated in Barron’s (1 July 2002) that “it dawned on me that just maybe the buy-and-hold mantra of today’s generation of stock-market investors might at long last be destined for the ash-can of history and that a solid stock-market recovery might not be just around the corner. In fact, the rules of the game seem to be changing in ways likely to shatter the expectations of millions of investors.”
Barron’s seems to share Paulsen’s view. On 1 July it published five “New Rules of Investing.” The first rule, directly repudiating Graham’s adherence to principles that can withstand the chilly winds of short-term misfortune, is “forget the old rules.” In particular, “the buy-and-hold mantra that was drilled into investors’ psyches by the bull market of the Eighties and Nineties no longer leads to nirvana. One can’t buy the dips anymore and expect to be bailed out. Just look at what has happened to all the bottom fishers over the past two and a half years. Most are now losing money with little prospect of any appreciable rebound.” Its second rule is to “trade the ranges.” “Over the next five to 10 years, the stock market is likely to be caught in a trading range, held in check by high valuations and anaemic earnings growth … Once a range seems to be established, it can be traded, though the terrain could be treacherous for non-professionals.”
The assessment of The Wall Street Journal (9 July 2002, see also 23 July 2002) is even harsher. “Buy and hold may be the last undiscovered scam of the bubble era. As investors cottoned to the stock market in the 1990s, professionals offered basic advice. Buy and hold for the long term. Stay the course. Buy the dips. Never surrender. The defrocking of buy-and-hold is just the latest body blow for individual investors. Already, they’ve endured Enron’s stealthy books, Merrill Lynch’s double-talking research analysts, Arthur Andersen’s shredding, Adelphia’s crony capitalism and, most recently, WorldCom’s explosive confession of book cookery that may top all lists. Now, the received wisdom of buying and selling is no longer the sure thing it was sold as. Individuals who have steadfastly bought and held this market right down to the sub-basement … may finally be realizing that they’re the last ones holding the bag.” The Journal concludes that “like many of the shortcuts we took during the bubble era, buy-and-hold is actually a rather evil truncation of an intelligent investment strategy … The buy-and-hold mantra seems more a feel-good nostrum than an effective strategy. Still, some individual investors continue to cling stubbornly to the buy-and-hold thesis. Perhaps they’ll be vindicated. The question is whether they can hold on long enough to find out.”
Gross Misconceptions and Hints of Comprehension
Barron’s apparently believes that a buy-and-hold approach once led and no longer leads to “nirvana.” According to The WSJ (9 July), “the buy-and-hold philosophy... argues that stocks go up over time.” Further, “buying and holding ostensibly applies differently to stock investors and fund investors. For stock investors, buying and holding makes little sense, since companies and trends change over time. A stronger case can be made for buying and holding an array of diversified mutual funds … But even with funds, buying and holding is no elixir. You could buy and hold the life out of an Internet fund, but that won’t make it come back to life.” These points, as Part III shows, are either false or misrepresentations of the cautious, value-based “buy and hold” approach that Graham advocated.
At the same time, however, the Journal’s analysis made two excellent sets of points. First, it stated that “the best way to think about it is buy-and-watch, or buy-and-beware … A potential variant on the blind buy-and-hold concept is to buy good companies and hold them. The challenge is in identifying good companies [and in watching them].” Second, and more importantly, it cited Jeffrey Bronchick, chief investment officer at Reed Connor Birdwell, a Los Angeles investment firm, who observed that “the investment managers, the fund world, clearly has a vested interest in telling people to stay the course, to buy and hold, because they make a lot of money on the assets they have under management. The fact is, buy-and-hold is not that easy a system. The reality is there are far fewer companies that are buy-and-holdable than there are publicly traded securities.”
…continued in Part II
 
Designed & maintained by
Artist Web Design
© 1999-2008 All Rights Reserved |
