The Buy and Hold Apocalypse

[thoughtanarchist]

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With every market correction comes a flurry of pronouncements that the so-called "buy and hold" approach is dead. Without even an attempt to define what is meant by the phrase "buy and hold," a bevy of journalists armed with all sorts of self-serving quips from traders and market timers descends upon the heartland of America. They then try to scare individual investors into putting all of their defined benefit retirement plans into the "money market" option, warning that stocks are "dangerous." The latest in a regrettable series of nonsense appeared in the Washington Post's Investing column over the weekend, but this is simply representative of a growing sentiment in pressrooms and on trading floors across the country. "Buy and hold is dead," they whisper. Now, it seems, only traders and market timers can make money. Individual investors are best-served by forking over their hard-earned savings to "financial professionals" who can actively manage the money appropriately, lining their pockets the whole time.

What is the "buy and hold" approach? Most people now nattering on about the subject in the wake of the recent market correction take it as "buy at the top and hold forever because you cannot admit you made a mistake." Others who have taken thinkers like Peter Lynch, Warren Buffett, Charles Munger or Phil Fisher at the facest of face values have talked about the "buy what you buy" school of investing that has individual investors mindlessly purchasing the shares of companies whose products they use without regard to fundamental value, holding them forever. All focus on the supposition that saying "buy and hold" means that people are purchasing shares without regard to fundamental value because if they hold for the "long-term" they are guaranteed to make money.

Frankly, this is a really shallow interpretation of the maxim "buy and hold." The buy and hold approach should focus on selecting quality companies with current market values that are at a discount relative to their underlying economic value. By accumulating these issues selectively over time and holding them, an investor minimizes transaction costs while maximizing the possibility of enjoying the long-term returns generated from the business. With the overwhelming correlation between corporate profit growth and long-term share price appreciation, there is quite a bit of wisdom in this approach, if the returns of a financial asset over time approximate the returns of the underlying company, either in profit growth or return on equity (ROE). (The reason why ROE is important is that excess cash generated by the business can be used to enhance earnings per share (EPS) growth through regular and systematic stock buybacks.)

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http://www.fool.com/school/buyandhold.htm?ref=SchAg
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