Monday, May 25, 2009

lil' wayne & buy & hold

"If 'buy & hold' is dead, then I am the embalming fluid"

Once again, I am using the world of rap music to derive my quotations about money and investing. Rapper, Lil' Wayne was talking about hip hop when he uttered this line in his single 'A Milli'. Lil' Wayne may wear his pants below his a$$, but he is a wise poet indeed.

The recent stock market collapse has certainly been an experience in observing perspective shifts from everyone from analysts, advisers, advertisers, to individual investors. Below are some of those new perspectives that have more than likely come from several sources over the last year or so. Whether it was an ING Direct commercial or your local politician you've likely heard some of these views lately:
  • Capitalism is dead, and no longer works as an economic system
  • More regulation, and less leverage is always better.
  • Everyone took on too much debt, and the recent crash will cause everyone to be very debt averse forever; let the de-leveraging begin.
  • The right thing to do with your money all along was to play it safe, and sock it all away in a savings account; assets with risk associated with them should be avoided at all costs.
  • Don't speculate, don't invest in stocks, don't buy real estate, don't take risks in starting a new business venture or making any kind of investment where loss is a possibility

...and my personal favourite:

  • 'Buy & Hold' as an investment strategy is dead.

All of these new postulations are the result of the human instinct to remember the most recent painful experience and alter one's thoughts and habits to correct for this. What has happened is akin to falling of your bicycle and breaking your arm. Perhaps walking is a better idea. Maybe you can't get places faster on your bicycle. The government should ban biking. Better yet, perhaps we should all stay in our houses. Do you want to buy a video game that simulates riding a bicycle? The real thing is far too risky and provides no real benefits to anyone.

Of course people are now saying that 'buy & hold' is dead. It's easy to think that buy & hold is a bad idea when the current 'hold' experience involves watching your investments fall by 40%. That hurts, for some probably more so than falling off of that bike. Does this in itself mean that buy & hold dead? I think not. Equities have been the best asset class to own over the long term, and I don't believe that will change. Try not to do all of your buying at the peaks and all of your selling in the valleys, and buy & hold will probably work out for you the longer you hold shares of quality firms that provide the goods and services that people want.

The best time to draw inferences about what works is probably not during and post a large market crash. Ask yourself, what biases are those making these calls prone to? For the vast majority of us, the market crash will turn out to have been a good thing long term. That is if we avoid buying into the inferences drawn by those with broken arms.

For those interested, my other financial advisor is Kanye West.


Sampson said...

Awesome, you've managed to incorporate rappers into your financial blog.

On the topic of the 'death of buy and hold' - I remeber hearing similar notions around 1999-2000. Its an interesting time since notions of investing do seem to be changing - I'm curious what the marketers for the Financial industry will come up with.

Actively managed ETF's seem like the next big thing.

Sami said...

great post. you always get these proclamations near crises events. Yet time and evidence are on the side of the buy and hold strategy.

I look at it in similar manner like Buffett. If you own a business you do not get in and out at the whims of prices quoted to you by the market, you stay as long as fundamentals of your business are well.