"Believing is easier than thinking.
Hence so many more believers than thinkers."
Somebody sent me this quote the other day and it got me thinking about how this applies to investing. There has been lots of talk here about the buy and hold approach. Buy and hold, I think, has some value in certain cases. For instance, some stocks fluctuate in a range of valuations that might make them seem a little over valued at times. One example is CELG which at times is a bit pricey when compared to other stocks one could own, but CELG also offers 1) a management team that is bother shareholder friendly and has demonstrated a high level of skill over a long period, 2) a recession proof business, 3) a consistently growing earnings, and 4) a very long view into what earnings will likely be in the future. These aspects make CELG worth holding even when its valuation rises a little above what might otherwise not seem prudent.
But I am talking about incanting buy and hold, buy and hold, buy and hold for other reasons. Is this chant a belief? Do you believe that your company might be the next big thing? Based on what? You should be honest that it’s not just blind faith. This is akin to believing rather than thinking, to hoping rather than putting in the effort to properly and thoroughly analyzing a business and assigning a realistic valuation on that business. To be fair, many people don’t have the skills or confidence to properly analyze a company…but learning this is possible. Saul has provide this board as one way to learn. I think that the tendency to want to believe and to assign reasons for certain unknowns or strange outcomes is to a large extent human nature. Religion is probably the most common example of this. A lightning bolt strikes and burns a house and people assign meaning. Zeus has been angered and has punished the inhabitants of that house. People make up explanations when they face tragedy or the unknown. This human tendency can play out in the stock market too. Holding on to stocks can be like blind faith or hope.
The true light in investing is to use your own brain to evaluate the current state of a company while analyzing the probable future for this company in the market(s) where it operates. Buy and hold can be an excuse not to do the necessary work which includes honing your skills at crunching some numbers, evaluating businesses, and making a determination of the probability of success. Buy and hold requires a lot less effort, but it also makes you more likely to be a blind squirrel.
Chris, Once again you show why you are one of my favorite fools. It really helps to have a knowledgeable person to debate the merits of a company, and their plans for the future.
i.e. Their plan for the future looks good… I like their execution… their margins look good, but how will they stop competitors from coming in and taking the market?
Holding is having faith in the future, but that faith needs to be built on knowledge. Recommendations are just the starting point for learning about a business.
I am going to use GoPro as an example, as I write this I do not have any GOPro but you can look at my profile anytime and see my holdings. http://my.fool.com/profile/TMFFlygal/info.aspx
I think GOPRO is cool and has invented a product that is growing in acceptance and attracted competitors. It is more expensive than competitors. It is important to have an opinion about GoPro relative to competitors. You could say to yourself “I will own (hold) GoPro as long as it is able to dominate the thrill seekers market for wearable cameras and get premium prices.” That could be an example of buy and hold. But that should not be an un-informed hold. It is imperative to follow the business and see if other competitors come in and erode their sales or margins. Holding while favorable business metrics are demonstrated.
The way we all get better is to focus the debates on the things about businesses that make them successful or not.
I think the buy and hold talk is trying to get investors to focus on something other than the daily quoted price. The market puts out a lot of noise. Events can happen between quarterly reports, but really the quarterly reports are the vital signs of a company,. I think investors should read quarterly reports. If you have too many stocks, start with your largest holding and mark your calendar and read the report before you do anything else. Then as Chris is advocating, think about what you have read.
I think the buy and hold talk is trying to get investors to focus on something other than the daily quoted price.
Absolutely. When I started investing many criticized the short term mentality of focusing on the latest quarter but seldom do you hear a good explanation about how long the long is. Any time you buy a stock, make sure you have an exit strategy. Get mentally ready for the conditions that convert the position from a hold to a sell. If you fall in love with a stock it’s going to be very difficult, heartbreaking!, to part with it. A bad idea.
Peter Lynch recommends selling when the story changes. But one can be more specific with each stock. Getting ready to sell is a big help in pulling the trigger sooner than later but don’t get trigger happy either!