Tuesday, 24 January, 2012

"Buy & Hold" is Dead - A new Trading mentality is called for!

"Buy & Hold" is Dead - A new Trading mentality is called for!

Books, so-called experts and the biggest stock market guru of them all - Ben Graham, the Guru of Buffett - All of them have, for long, been vocal advocates of a "Buy-and-hold" strategy. In fact, they've often gone on to claim that the ideal holding period is "forever".

Taking into account a few developments of the past decade or thereabouts, I've begun to question this hypothesis. Here goes:

  • Folks like Eastman Kodak, Henry Ford, Tata, Bajaj, etc. believed in starting a business and running it for generations.
  • People like Graham or, for that matter, people like Buffett were brought up in those times. For them, it was perhaps justified to identify good managements running good businesses and adopt a buy & hold strategy.
  • The last 10 years have seen a completely new paradigm shift. The trend originally started a couple of decades back with "Neutron Jack" Welch, but became increasingly fashionable over the past decade. Businessmen are supposed to be "dispassionate" about their businesses. They are now supposed to be willing to quit a business (sell or close down) that doesn't do too well. They're supposed to "dump" everything that's not core.
  • Terms like "Serial Entrepreneur" have become a rage. There are entire groups of very smart people who start a business, take it up to a particular level, sell out, move on to start yet another. Almost like a relay-race.
  • Yet others get stuck with their own idea, take it to a particular level of financial success, but stagnate thereafter.
  • We actually have concepts like "Life-cycle CEOs" - Those who are fit for a start-up are not OK for a "Growth Business". Those who are "Growth" CEOs are not OK for "Turnaround" situations.
  • When nimble-footed "Entrepreneurs" wanna "sell & scoot", the biggies also seem to keep doing it all the while. Just look at GE (The global biggie) or Tatas (the Indian biggie) - Each of them must have started a dozen businesses and exited another dozen over the last few years.
  • A good number of these companies are in the listed space.
  • When a typical "long-term" investor buys a company, he looks at a few factors:
    • Quality of Promoters, their Corporate Governance standards
    • EPS, Likely EPS Growth
    • Industry and company prospects
    • PE levels and PEG levels
  • If the original promoter is going to be willing to "sell-out", he's certainly not going to be publicising the event well in advance, certainly not to minority shareholders - Except as mandated by the law of the land
  • And Increasingly, promoters do keep selling out either their entire stakes or very significant chunks of their businesses from time to time.

Taking into account all the above facts, does it still make sense to adopt a buy-and-hold strategy for your equity investments?

I think not.

Instead, I feel that we ought to adopt a "trading mentality" while investing in shares. Adopt your own basket of yardsticks, thumb rules, guidelines, strategies - anything goes. However, what we must do is:

  • Buy based on your own basket of investing rules
  • Identify BOTH a profit target and a "Time for review" target - as also a "stop loss" level based on your risk appetite. What's vital is to
    • Fix a reasonably large profit target (so that you don't become a day trader - a surefire way to enrich your broker at your expense AND
    • Fix a reasonably frequent "Time for review" - After all, business cycles are becoming shorter all the time
  • If the profit target is reached, do a review
  • If the "Time for review" is reached, do a review
  • In the review process, take a look at whether you will buy the very same share based on your very same basket of investing rules at the current prices.
    • If the Answer is "YES", either hold on to your shares or buy more - And fix a fresh profit target and a fresh "Time for review" target - as also a fresh "stop loss" level based on your risk appetite - And repeat the above process from time to time
    • If the Answer is "NO", sell and scoot. Don't hesitate. After all, the market consists of a few thousand shares, at least a 100 of which will, hopefully, be investment candidates at any given point of time.


"Buy & Hold" still makes a lot of sense in a completely new avatar - To my mind, that is in the sense of an "Asset Allocation Strategy".


Once you identify the percentage of your overall assets that you wish to allocate to equity, it certainly makes sense to adopt a "Buy & Hold" strategy of ensuring that you do have the desired allocation to equity as an asset class. (Obviously, this also comes with the additional Caveat that you must review and re-balance your overall portfolio to ensure that the desired asset allocation is maintained 95% of the time)


Happy Trading!



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