Monday, 11 October, 2010

Buy-and-hold is Dead

Happy investing!

Buy-and-hold is Dead
Long live Buy-and-hold!
Apparently, once one starts writing a blog on any subject, one is inundated with absolute gems from all around on that very subject.
This post is also based on one such gem that I got from some unknown source. First, the original mail:
Buy-and-hold is far from dead but perhaps it has been misunderstood. As with many other investment topics, it is instructive to look to Warren Buffett's example.

Perhaps no other investor personifies buy-and-hold more than Buffett, who has stated that his preferred holding period is forever. But as with all things Buffett, this folksy tidbit is not his final word on this topic. When it comes to the Oracle of Omaha, we need to observe Buffett's actions as well as his words and for that, we go back to Buffett's early days running his hedge fund.

In letters to his partners, Buffett laid out three investment categories (later expanded to four): generals, workouts and controls. The generals were the buy-and-hold portion of his portfolio and usually comprised the largest portion of his holdings. These were value stocks he bought but was unable to predict when he would realize the expected gains. In fact, he warned that these stocks could suffer long periods of underperformance. The controls were similarly undervalued companies but where Buffett could take an activist (or controlling) role which could provide an impetus for realizing the value in these positions. Both of these categories could be labelled as buy-and-hold strategies.

The workouts, by contrast, were short-term investments with defined timelines and catalysts for validating the investment thesis. By their nature, these were not buy-and-hold investments yet they were an integral part of his early investment strategy. It is important to remember that Buffett was running a hedge fund and unlike today's charlatans, refused to be paid unless he made money for his partners. This provision also ensured he was very motivated to deliver positive annual returns. The workouts segment was instrumental in providing near-term, relatively dependable returns to balance out the buy-and-hold portion of the fund's holdings.

My take:
This had been a much-debated topic for discussion as well as introspection.

I was thoroughly convinced about the need to "Buy & Hold". It is quite apparent that it generates untold of long-term wealth. All of us have our own favourite examples. Mine is TITAN INDUSTRIES. A couple of decades back - perhaps around the time when Titan was just listed, I was a newbie to the stock market.
I'd identified it as a good pick, and picked up a then "huge" quantity for me - 200 shares at Rs. 30/=. As I'd predicted to myself, over the next few months, it moved from strength to strength, and, within 5-6 months, crossed Rs. 60/=.
I was thrilled. I'd doubled my money in less than a year.
And, I sold all my Titan. Doubled my money in less than a year. The rest, as they say, is history.
In due course of time, I learnt one of my most valuable lessons.

I've certainly not come to any conclusions about dumping "Buy & Hold".
However, it is absolutely imperative that we must not be wedded to the "Buy & Hold" strategy. Or else, we would have got sub-optimal returns by holding on to our shares (like most of us did) between November 2007 and February 2008.
Each of us ought to identify our own personal style of investing which works best for us.
I personally prefer to classify stocks into the following categories:
  • STEADY BLUE CHIPS - A good example would be a scrip like HDFC Bank - Always looks expensive on PE terms. A couple of quarters after you refrain from buying, if you take a look at it, it would have gone up even further, and will still look expensive. But, surprisingly, the old price at which you originally refrained from buying will now appear to be an attractive price based on the current earnings. The only problem - You'll never be able to catch it at price levels acceptable to you. With such stocks, there are only two alternatives - either buy with either blind faith or conviction and hold forever - or forget about holding them at any point of time!
  • UNSTEADY BLUE CHIPS - A good example would be TISCO - Thanks to the commodity cycle (or whatever) it gyrates wildly, but nobody ever disputes about whether it is a blue chip. After all, it belongs to the house of TATAs & it has been around for more years than most of the investors' parents have been around on this planet. With such stocks, try and identify good levels to get in and to partly get out, and keep accumulating ever-increasing quantities. On those rare occasions when you end up buying such shares at the equivalent of January 2008, you can still mentally afford to keep them for good, as part of your long-term portfolio.
  • MOMEMTUM BOYS - An excellent example would be Aban Offshore - Of course, the momentum boys keep changing in every cycle of 4-5 years. In some yester years a Silverline or Pentamedia or NEPC could have been momentum boys. These scrips gyrate without any rhyme or reason - and sometimes with reason. In percentage terms, they move around very violently. My strategy for such stocks is to allocate relatively minor sums of money, identify good entry / exit levels, keep buying and selling quickly, and maintain very strict stop losses. The last part about strict stop losses is the most important part, but has been perennially difficult for me. Reason - Behavioural Finance fundas (either listen to people like Parag Parikh to know more or wait for a future post on the subject of Behavioural Finance)
  • OVER THE HILL GRANDPAS - These are the stocks that were, once upon a time, great companies. Perhaps were part of the SENSEX in yester-years. And belong to very reputed business houses - with promoters who are typically part of the "Old Rich". These companies may or may not recover their old glory ever again. However, the probability of their disappearing altogether is quite low. And, surprisingly, every couple of years, they end up quoting at sub-par levels (like Rs. 8-10 for a Rs. 10/= share), and in every couple of years, they also reach modest levels (of Rs. 20-30 for a Rs. 10/= share, for instance). Examples of such stocks would include companies like Hindustan Motors, SPIC. I'll be willing to have greater confidence on these stocks than the momentum boys. Hence my allocation could be slightly more. However, I'll strictly look at them as mid-term trading ploys with strict stop losses. Buy when they go to sufficiently low levels and get out when you've doubled your money a few weeks / months or a couple of years later. It is bound to happen. But, please don't ask me why or how - I have no reason to proffer!
Happy investing!


I was equally convinced about the wild swings of the "Manic-Depressive" "Mr. Market" - After all, the indices keep going up and down all the time, taking all kinds of good, bad, ugly and crooked stocks along with it.
An interesting way to make money would be to keep "trading" by buying 2-5 times a year and selling 2-5 times a year the very same stock. This would also fetch lots of money, provided, of course, you choose the right stocks.
Good examples of pretty high quality companies which keep going up and down in 2-3 year cycles would include TISCO, ICICI Bank, etc.
If only we learn to use the ups and downs, we can freak out with many of these stocks. I did that with a couple of stocks, and benefitted significantly.
In due course of time, I learnt another of my most valuable lessons.
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