The recent recession has drawn critics from all sides ready to besmirch and accost the buy and hold investor as foolish and behind the times. They argue that the long-term, buy and hold investment strategy exposes the investor to too much risk from market volatility. Citing examples from the Great Depression, the Great Recession, and other market downturns, the critics paint a grim short term view of the market as too uncertain and dangerous for the average investor. Some critics even go so far as to call the buy and hold strategy dead. While it is true that the recent recession took its toll on many investors, there are still those who have stayed the course and maintained their buy and hold strategy.
The reason for this is that the buy and hold investor has a long term view of the market. Short term swings, both high and low, are expected. As the name implies, the buy and hold investor “buys” an investment and “holds” the investment for a long time. This approach runs contrary to the market timing approach advocated and used by many day traders and technical analysts.
A key to the buy and hold investment strategy is a belief in the efficient market hypothesis. This hypothesis works against the market timing and day trader approaches by stating that it is impossible to time the market because efficiencies in the market cause the share prices to reflect all pertinent information. In other words, the stock price incorporates all of the known information about the underlying investment and therefore the share price is at a fair value and neither undervalued or inflated.
The buy and hold investor also recognizes that over time, and with a long term investment horizon, the stock market provides a better return than other investments. As Chris Farrell points out, since 1802 “the compound average annual return on stocks adjusted for inflation has been about 7%.” This is based on calculations by Professor Jeremy Siegel of the Wharton School.
This does not mean that the buy and hold investor can buy just any stock and hope for the best. Nor is the buy and hold investor one who buys at the top and is afraid to admit he made a mistake as the investment plummets. As Randy Befumo (MF Templar) notes, these would be very shallow descriptions of the buy and hold investor. Instead, the investor picks sound investments, priced at a discount, based on the underlying fundamentals of the investment. She then holds the investment as long as the fundamentals remain positive and she is still within her planning horizon. She does not react to short term price swings and certainly doesn’t attempt to time the market.
At the bottom of the recent recession, wise buy and hold investors seized the chance to buy. They saw that many stocks were undervalued and established long term positions in solid companies that had either weathered the storm or had strong prospects looking forward. Disregarding the advice of their critics, these investors found opportunity for their investment strategy and as a result, the buy and hold investor lives on.