Saturday, March 28, 2009

Buy and Hold Strategy For The Long Term...Rethink again

So what does the term buy-and- hold really mean? How long does one hold to consider oneself such an investor? Frankly, its just an academic jargon which is of no use debating over. Life is larger than this. We were reading up on Marc Faber cos he looks abit like Hannibel Lector in the movie and also because he said that it is a myth that stock markets go up generally in the long run. So well.. this guy is a smart guy..having gotten his PHD in economics at age 25 and having so much experience in the money markets of the world.....his comments is at least worth some consideration. Besides, conventional wisdom says that when one is young, start investing in equities as in the long run, equities in general rises. One can see this is by clicking on the charts for the DJIA (Dow Jones Industrial Average Index).

Taken from the book below......

" The average life expectancy of a multinational corporation-Fortune 500 or its equivalent-is between 40 and 50 years. This figure is based on most surveys of corporate births and deaths. A full one-third of the companies listed in the 1970 Fortune 500, for instance, had vanished by 1983-acquired, merged, or broken to pieces. Human beings have learned to survive, on aver-age, for 75 years or more, but there are very few companies that are that old and flourishing. "

And this research is based on Fortune 500 companies which are considered blue chips and therefore relatively considered less risky than those mid-cap or small- cap stocks. Its quite scary to think whats the average lifespan for mid-cap or small cap stocks then.....10-30 years? Therefore, it is imperative that one researches the stocks thoroughly before buying, instead of just buying many different stocks after a surface read-up on the company, in the guise of the oft-used word of "diversification".

Serves to remind one also to allocate at least 2-3 times a year to rebalance and relook at ones portfolio. Anyway, the authors also did a study on why some select few companies were able to grow beyond the lifespan of a normal company and one of the common factors is the financial prudence of the company management and board.

It terribly irks SGDividends when we receive glossy, thick annual reports every year! Save the money and trees..dudes!


Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team

6 comments:

  1. theory still holds, although need to be mindful of survivorship bias as pt out above when looking at past data.

    one way ard this is to continually investing in the index: e.g. SPY. it doesn't promise to be a smooth ride: need stomach the ups and downs. but in the long run returns should tend to the expected return of S&P500.

    however, if one happen to need $ when the mkt is in a downturn and can't wait for recovery..... the return could be severely reduced or even negative.

    so don't put all eggs in one basket. invest across different asset classes if possible.

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  2. Hi Anony,

    Yeah personally...the theory still holds in general...and index is a good way..agree..

    However, the Nikkei Index has been down since 20 years...an example that it does happen =)

    SGDividends

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  3. Index Investing might not be good for people like sgdividends who have a knack for reading balance sheet.

    Take Nikkei for example.. if you had constantly DCA into the index... you won't be better off..

    However, if you had invested in individual blue chips, you might be enjoying a lot more in terms of dividends and havinv the option to sell selected stocks of the index instead of the whole index.

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  4. Hi Anony..yeah we personally dont do Index investing for example...we dont like some of the companies in the STI components....

    So guess index investing is more useful for people who are absolutely clueless about what to look out for ....

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  5. Buy and hold is going to be a bad strategy.

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  6. Buy and hold can sometime be a wise investment idea.

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