In March of this year, Warren Buffett said in an interview with CNBC that his advice to the average investor is to buy and hold, and “not watch the markets too closely.” Let that sink in for a moment; a man who has made his entire investing career out of timing when to buy and sell, telling you, the “average investor,” to do just the opposite of what he does day-to-day at Berkshire Hathaway. This week we will be discussing why buy and hold may not only be dead, it may have never been a viable option in the first place.
Some professionals argue that investors cannot “time the market.” Market timing is the act (or art depending on who you ask) of predicting the future direction a market by using technical indicators and economic analysis. Market timing gets a bad rap among some experts, but at Treece Investments we believe that timing plays a large part in the decisions that investors make about their portfolios. Remember, there are not many aspects of investing that are in our control direct control, but we can control when we buy, and when we sell. When utilizing a strategy that involves actively buying and selling securities, we are in effect timing the market. Not only that, but to say that investors cannot time the market implies that one should simply buy large cap popular stocks and hold them for eternity. Take that concept, now imagine that your portfolio held significant positions in Delphi, Enron, Worldcom or Lehman Brothers. All of a sudden, buy and hold does not seem quite as attractive.
Furthermore, when looking at historical prices, the concept does not hold any weight. For our example we will be looking at the Dow Jones Industrial Average. First we will show you a chart dating back to 1915 (all charts courtesy of MacroTrends.net…)
Any the next chart shows what the annual nominal return on the Dow was for every year since 1915…
Now watch what happens when we adjust the historical price of the Dow for inflation and chart the numbers in real 2016 terms…
This changes the results of an investors buy and hold technique significantly. When adjusted for inflation, an investors that bought and held the Dow made 0% on their investment from…
During those periods of time, the best way to have made money was to actively manage your portfolio by buying low and selling high at the right times.
The thesis is simple; buy and hold does not work for your stock portfolio. In reality, it does not work for ANY portfolio. For example, let’s take the same example of inflation adjusted vs. non-inflation adjusted (real vs. nominal) returns in the gold market, or what many investors would call a “safe-haven” asset class or a risk-off asset class.
First, we will note the nominal return on an ounce of gold since 1915…
But when we adjust for inflation…
You can see that from 1934-2005 in real dollars, investors made a 0% return on an ounce of gold (keep in mind that gold has always been intended to be a tangible store of value).
In closing, our advice to investors is not to be swayed by professional investors that tell you to do one thing then do the exact opposite for their own account. Most of all, we as investors have very little control over financial markets, except for the prices in which we buy and sell at. Don’t ever let someone tell you that trying to maximize value by timing your investments is a futile endeavor. That is why at Treece Investments, not only do we attempt to actively trade client accounts, but we also hold the same positions as our clients.
If you have any questions about our investment strategy, please reach out to us through our contact us page for a complimentary consultation.