August 14, 2006 –
Unless your name is Warren Buffet, the days of buy and hold are over. Actually even if your name is Warren Buffet, the days of buy and hold are over. At least they are for the rest of this decade. Buy and hold as a strategy is dead and will get you nowhere for the second half of this decade.
Take a look at the following stats.
The U.S. Indexes
From Oct. 31, 2000 to Jun 16, 2006, the U.S. S&P 500 index went from 1,429 to 1, 256, a loss of 12%.
From Oct. 31, 2000 to Jun 16, 2006, the U.S. Dow Jones index went from 10,971 to
11, 014, a gain of 0.3%.
From Oct. 31, 2000 to Jun 16, 2006, the U.S. Nasdaq index went from 3,369 to 2, 129, a loss of 37%.
The London Indexes
From Oct. 31, 2000 to Jun 16, 2006, the FTSE 250 index went from 6,589 to 9,114, a gain of 38%,
From Oct. 31, 2000 to Jun 16, 2006 the FTSE Techmark100 went from 3,353 to 1,321, a loss of 61%.
The Japanese Indexes
From Oct. 31, 2000 to Jun 16, 2006, the Nikkei 225 went from 14,539 to 14,860 , a gain of 2%.
For the past six years, if you had primarily been invested in the U.S. in portfolios that tracked the major indexes, you would have gained no money, or lost between 12% to 38% of your money. During this same time period if you were invested in the U.K. indexes, you would have gained 38% or lost 61%, or somewhere in between, depending if you were invested in the tech sector or not. Even if you had gained 38%, broken down to annual returns, this return rate is much less impressive return of just over 8% a year. And in Japan, you basically would have made no money over the past six years being invested in the Nikkei 225 index.
But what about China and India?
Sure those markets must be considered, but even though the results of these markets have outpaced all other markets recently, emerging growth markets always experience strong growing pains so can not be considered as buy and hold markets either. Just consider the recent pullbacks in India in mid-2006 where the Indian markets lost over 40% in a matter of weeks.
But what about Warren Buffet, one of the greatest individual investors of all times, who still advocates buying and holding? I would buy and hold too if I already had billions of dollars, because being flat for several years would not hurt me at all. But most people don’t want to or can’t afford to be flat in their investments for several years. And in addition, Warren Buffet still invests in assets that most people don’t ever consider to hedge against a poorly performing stock portfolio. And this is not even to mention his multi-billion dollar insurance business.
The Global Economy is MUCH Different Today than it was Just Six Years Ago
It is undeniable that today is a much different world than it was six years ago. The U.S. had not yet invaded Iraq for a second time yet, Israel had not yet started a war against Lebanon which the United Nations just condemned as “acts against humanity”, Syria and Iran had not yet threatened to intervene in Middle East conflicts, the U.S. had not lost faith in Saudi Arabia as a continued source of oil, N. Korea had not test-fired long range missiles, and the U.S.’s displeasures with Russia and Venezuela had not come to a head yet. All of these geo-political concerns will continue to create a very up and down stock market all over the world, and buying and holding will most likely leave you six years from now as the people who bought and held six years ago.
You must take different strategies in today’s world to build wealth. Identifying the proper stocks in the proper countries at the proper times and trading in and out of markets will be the only way to grow wealth in the foreseeable future. We’re not talking about day trading by any means, but we are saying that buying and selling stocks after holding them for just a year or two is becoming increasingly necessary. Of course, you can elect to sit on the sidelines in cash as many people do, but just remember that even in turbulent markets, you can make money in stocks that rise considerably in Mexico, Brazil, Japan, Canada, the U.K., Germany, China, and the U.S. if you just shed old-school buy and hold beliefs and start looking for opportunities instead.
By doing so, by following the MoneyMitesâ„¢, you find the best “non-stock” assets to buy as well.
In martial arts, buy and hold is like being engaged in a sword fight. If two skilled masters are engaged in a sword fight, once one party has engaged the other, one person will make a mistake within eight seconds time and be dead. That’s why often, a master will remain motionless and wait until his opponent commits to a strike before counter-striking. And though the fight will end in death within eight seconds, masters have been known to stand motionless for minutes before committing to a course of action. This is all good if you have all the time in the world to wait. You can stand there for an hour if you want waiting for your opponent to commit. But in investing, if you want to build wealth, can you really afford to wait ten years just to gain 20% over those ten years? Global investing has changed so much today that this is not the path of the sage. Today global investing is all about being able to identify opportunities before anyone else does.