Value Added
Buy and Hold Worked -- It Just Took A While
The most time-tested strategies for investing have returned from the dead. What now?
By Steven Goldberg, Contributing Columnist, Kiplinger.com
April 13, 2010
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Staying invested in stocks through the catastrophic bear market took superhuman nerves, but buy-and-hold investing has just about been vindicated. Ditto for the practice of picking stocks one at a time through fundamental analysis rather than relying on big-picture analysis.
After Standard & Poor’s 500-stock index plunged 55% from October 9, 2007, through March 9, 2009, countless experts declared the death of buy-and-hold investing. Many of the stock funds that Kiplinger’s Personal Finance had recommended for years -- those whose managers bought good stocks and pretty much ignored broad economic trends -- lost even more than the index.
During the bear market -- the worst since the Great Depression -- some stocks went to zero because the entire economy nearly collapsed. “The macroeconomic environment dominated everything in 2008,” the managers of Longleaf Partners Fund (symbol LLPFX) noted in a recent letter to shareholders. Focusing on individual stocks “seemed practically irrelevant,” they added.
Critics of buy-and-hold investing had a field day. Ignoring the macro picture was obviously a loser’s game, they said. To profit from the markets, managers had to spot economic tsunamis when they were still beyond the horizon. Then they had to time their moves in and out of the entire stock market accordingly. Managing money any other way, they said, seemed like sheer lunacy.
But the stock market’s rebound over the past year has been every bit as riveting as the downfall. From the time the S&P 500 hit bottom through April 9, it soared 81%. Many of the funds that suffered the greatest damage during the selloff have produced the most-spectacular advances during the bull market.
Take Bill Miller, the manager of Legg Mason Value (LMVTX), which beat the S&P 500 a record 15 consecutive years through 2006. The defining characteristic of Miller’s success was to never stop buying a falling stock as long as he believed the underlying company was fundamentally sound.
That was a terrible strategy during the bear market. Legg Mason Value plunged 72%. Legg Mason Opportunity (LMOPX), which I had recommended, tumbled 81%. But since the market bottomed through April 9, Value has rocketed 114%, and Opportunity has gained a spectacular 239%.
The two funds’ cumulative returns from the start of the bear market remain negative. Morningstar computes that Value is still 40% in the red and Opportunity is 35% in the hole. But they’ve made back a ton.
In general, fund categories that lost the most in the bear market have gained the most in the bull market, Morningstar says. Large-company growth funds, on average, lost only 52% during the bear market and have rebounded only 76%. Small-company value funds lost 58% but have recouped 120%.
Over the entire period, it didn’t matter much which types of funds you bought or sold -- so long as you stayed in stocks. For instance, large-company growth funds, on average, are now down just 16% for the entire period, and small-company value funds are down just 10%.
Yes, you would have been better off if you had sold at the market’s October 2007 peak, but how many of you actually did so? And if you did sell, did you return to stocks before the market bottomed? Did you come back after the rally began? If so, how much of it did you miss? Are you still sitting on the sidelines? The point is, buy-and-hold investing requires just one decision. Anything else involves multiple moves.
Was 2008 an anomaly?
Longleaf Partners Fund, run by highly respected stock pickers, lost 65% in the bear market, then rebounded 110%. Shareholders peppered the managers with questions after the 2008 debacle. “Interestingly,” Longleaf noted in its shareholder letter, “we have not been asked about ‘the lessons of 2009.’ ”
The managers raise a critical question. Was 2008 an anomaly? Was it a once-in-a-generation event? Should we all go back to picking stocks and funds the old-fashioned way? Or will the stock market be unusually volatile, rising and falling largely because of big-picture developments for years to come?
(Quick side note: In April 2008, about six months after the start of the bear market but long before the worst of the meltdown, I recommended Six Stocks to Buy and Hold, calling them “safe bets for the next ten years.” Curious how they have performed? The recommendations, from Elliott Schlang’s Great Lakes Review, have returned an average of 1% since my column’s publication -- thanks partly to the fact that four of the six pay dividends. Alberto-Culver (ACV) rose 0.2% and trades now at $27.39; Ansys, Inc. (ANSS) is up 20.4% and sells at $43.96; AptarGroup (ATR) gained 5.1% and trades at $41.15; Dentsply International, Inc. (XRAY) dipped 11.3% and trades at $34.86; Stericycle, Inc. (SRCL) gained 3.4% and trades at $55.81; and Stryker (SYK) lost 11.7% and sells for $57.18. Great Lakes currently recommends buying or gradually accumulating all but two of them. Those two, Dentsply and Ansys, are rated hold strictly on valuation. When their prices dip or their earnings rise, they’ll be buys again, too.)
Longleaf’s managers believe 2008 was the exception. “Bottoms-up, fundamental company analysis matters quite a bit,” they wrote. “We should not abandon lessons from [Benjamin] Graham, [Warren] Buffett and our 35 years to become macro-driven ‘generals-fighting-the-last-war.’”
Today’s market faces big economic risks. Greek bonds and, indeed, the whole structure of the euro are being called into question. The U.S. suffers from high unemployment and huge debt problems. China is struggling with a real estate bubble and inflation. Will one of these, or another unforeseen crisis, again overwhelm buy-and-hold investing and fundamental stock analysis?
My hunch is that they won’t. I think a cataclysm like the one we experienced in 2008 is a rare event. But the definitive answer will come only with time. Meanwhile, thankfully, most of the losses from the panic of 2008 are history.
Steven T. Goldberg is an investment adviser.
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Reader Comments (20)
Posted by: Bob at 04/14/2010 10:16:08 AM
My mother-in-law used the buy-and-hold strategy - with Enron. That was her half-million-dollar mistake. But she explained: all the big smart guys were buying Enron too, so she just did what they did. Now the big smart guys are saying "Let's buy and hold again, guys." Does my mother-in-law just want to do what they do - again? Does she want to go down 72% or 81% again? No - this time it's the kind of orders that take her to stop-loss city, and her stop-losses will be tight.
Posted by: Federalist45 at 04/14/2010 11:03:01 AM
Please, just read again what you wrote here. The funds you tout as big winners are still down 15% or 20% since the 2008 collapse. I was in Legg Mason Value, trusting the hype and following the 15 years of positive performance vis-a-vis the S&P. I lost so much money with the buy-and-hold strategy you still recommend that I had to either take what little remained and run, or risk having nothing left in that particular investment. This was true of EVERY stock mutual fund I owned in 2008. With most, I was able to wait out the return to "normalcy," but for most of those I bailed when the DJIA hit 9,700-10,000--to stay any longer was simply too risky. With a government debt that is catastrophic, with Wall Street and federal manipulation of markets, with the dollar approaching the brink of collapse, one would be insane to buy-and-hold. What, given this administration's penchant for stealing money from the investor to buy votes in order to build power, leads you to believe that this economy and the stock markets can survive beyond a few more years?
Posted by: Kent at 04/14/2010 02:04:39 PM
I think this proves buy and hold does not work! The two funds cumulative returns from the start of the bear market remain negative. Morningstar computes that Value is still 40% in the red and Opportunity is 35% in the hole. But they've made back a ton.
Posted by: JD at 04/14/2010 05:55:44 PM
Took a while? It took a couple of years. It was always advertised as being a strategy for decades. Why is anyone surprised? The long term returns on stocks over the last 40 years remains over 10%/year. Always did.
Posted by: JR at 04/14/2010 09:00:13 PM
Glad you included that despite these "spectacular" returns at Legg Mason, Value and Opportunity both remain 35-40% down overall. You've got to understand the base. For the record, I own both and still believe that Miller has learned from this (just read his commentary on quarterly reports). I also believe even more firmly that in the end, it's hard to find a person that beats the broad index over a decade or two (after expenses). And that's the idea behind buy and hold!
Posted by: Ave Joe at 04/14/2010 11:06:22 PM
You're so right..We average investors have to 1. Own a Real Balanced Portfolio of 50/50 and no more in equities 2. Trust in the Funds and Mgrs will do their jobs 3. B&H and rid the waves...That is Until We Save up enough $ and LT Treasuries go back to paying 7% or more Then Sell everything and Buy them Invest any new $ into that 50/50 Bal port there after...AND I don't think for a Minute that There won't be More major market 'Corrections' as they like to call them.. In the Real world they are just the results of Devious people that build up the sector or market to sucker everyone in and then they pull the plug...And there is Nothing anyone can do about that..Except Shut down Capitalisum and Wall Street as we know it.. or Just Shut down being able to leverage $1 million into $10 million and the Options game...
Posted by: Dogfather at 04/15/2010 06:57:40 AM
In 2007 I was nearing retirement and had a 50/50 allocation of stock and bond index funds. I rode Mr. Market all the way down and all the way back up. I did sell funds at year end 2008 to benefit from capital losses, but replaced the funds with similar ones. My portfolio is now 8% ahead of where it was when Mr. Market started down. Buy and hold worked for me, but it took strong cajones to stay the course. I advised my sons to do the same and keep investing. While they looked at me like I was crazy... buy, hold and keep buying during the sale worked for them too.
Posted by: eric at 04/15/2010 08:49:56 AM
Unbelievable this gets printed, buy & hold has long ago proven to be a failed method of accumulating money for the investor. It does accumulate expenses, fees, commissions for the brokers and investment banks. Almost laughable!
Posted by: Dan at 04/15/2010 11:56:45 AM
OMG, the ol' "my mother-in-law bought Enron and see what that got her" argument... First of all, there is NO reason why ANYONE should have $500,000 in ONE STOCK. That's just stupid. As you get older, you shift from stocks to bonds because your timeline decreases, ie your ability to withstand the roller-coaster market decreases. A person that is 65 should not invest like a person who is 25 (and even the 25 year-old should have it spread out over many stocks, either individual stocks or through a mutual fund).
Posted by: Bob at 04/15/2010 03:54:35 PM
"Buy and hold worked..."??? Maybe, but a lot depends on what you bought and how long ago. I held on and my stocks have come back to some extent but things are still well below two years ago. I'm now going to stay out of any future stock buys until I see if any meaningful regulations are put into place. I'm not a gambler and I don't like the current Wall Street house rules.
Posted by: Brian K. at 04/15/2010 06:58:17 PM
Q: Is now a good time to buy stocks? A: Sure! It's always a good time to buy stocks! Q: What should I buy? A: Here...you can buy mine!
Posted by: Mark Wolfinger at 04/16/2010 12:29:27 AM
Disagree. What is showed that it's mandatory to hedge an investment portfolio with options. The loss would have been much much smaller and the subsequent gains would have been reduced. Result: Out-performance with far less portfolio volatility. No huge losses and better result than the poor souls who suffered all the way down. Vindicated? Not to me. They were ignorant and foolish. Then got lucky. Options negate the need for 'luck.' Financial advisors just don't understand the value of options as a risk reducing investment tool. Why are they so blind in this area?
Posted by: Steven at 04/16/2010 11:27:50 AM
As the writer of this column, I got a lot from reading all the comments. Buy-and-hold doesn't buying just one or two stocks, or one or two funds. It means diversifying into different areas of the stock market, as well as--for most investors--into bonds. Know thyself is maybe the most important lesson of all from the last two years. I'm 61 years old and quite comfortable with 75% of my investments in stocks. But that's not going to suit most investors my age. But avoiding stocks altogether--because you don't like what's going on on Wall Street or in Washington--seems self-defeating.
Posted by: monkeyfurball at 04/18/2010 12:21:00 AM
Buy and hold works better if you keep buying during severe market drops like 2008. I did that with two Vanguard stock index funds that I owned before the recession. Hard though it was, I kept buying all the way down, even still buying at Dow 6600. The result: I was back to even by August of 2009. I'm now up over 30% from my old highs pre recession. I'm up that much and the indexes are still down over 20% from the old highs. Buy and hold works better if you buy lower and keep holding.
Posted by: Bob at 04/21/2010 10:06:35 AM
Who says the recession is over? Certainly not the unemployed who will continue to look for what inevitably will be lower paying jobs. Certainly not the bankrupt State governments who are in the process of raising taxes and fees on everything. Certainly not the average working person who is already being hammered by higher gas and energy prices. Certainly not those who had insurance but appear to be looking at huge health insurance premium increases with higher deductibles and less coverage along with new taxes on what they do have. The Great Depression was a roller coaster ride that fell to new lows after every short upswing. Until I see some real regulations put on Wall Street and the financial industry, I don't think our current ride is nearly over.
Posted by: activefundmgr at 05/01/2010 07:56:52 PM
buy and hold certainly does not work for me...
Posted by: monkeyfurball at 05/13/2010 09:17:15 PM
Buy and hold works great for me. I gritted my teeth and kept adding to my Vanguard index funds during the entire downturn in 2008 and early 2009. My portfolio was actually back to its old highs by October of 2009. I've continued to add on days where the DOW drops at least 100 points. I'm up about 16% year to date. Booyah.
Posted by: Yernamehear at 05/14/2010 11:36:39 AM
Poorly written article and/or poorly communicated strategies. 1. in a comment you say you are 75% in stocks, which is a very important fact. You have asset class diversification in the portfolio (with a fairly poorly correlated asset class- which is what you want) 2. your previous missive on the subjec told the story of watching Zweig's sell signal, trading on that, BUT you ignored his subsequent buy signals. When you time, yes, (as you do say), you have to buy and sell. Zweig's systems minimized trading, and as such were very useful in the recent downturn. It is unacceptable for people near or after retirement age to have losses of 20+% in a portfolio. Buy and holders may have bought at 1500 on the S&P. Oops. Thanks for the article, but the details are fairly poorly communicated. When this bear market is over, you will have another generation of investors repelled by the the thought of stock investing. That'll be the start of another secular bull. I am pretty sure if you hold through the next downturn, you'll have a lot less to invest in that opportunity. Best of luck to you.
Posted by: JRM at 06/10/2010 05:09:52 PM
Twenty years ago I graduated college and entered the full-time work world. I was part of the generation that bought into the basic concept behind Buy&Hold: OVER TIME, the stock market historically returns >10%. It seemed to make sense, so I started investing in my 401k from day one. My generation helped fuel the growth of the markets because we invested. The Dotcom boom made me understand the role of speculation and its history in various stock markets. Read "A Conspiracy of Paper". It is a novel about the British stock market bubble of the 1750's and pertains to events in 2008 and 2001. What has 20 years of investing taught me? There are no fundamentals. Investing in the stock market is just legalized gambling. Every thing is pure speculation. With markets being run by computer programs, do we really understand what drives markets? Without real information, there is only speculation. My suggestion: Just understand that investing in the stock market is like walking into a casino in Vegas. Investing is stocks is a game of chance. Like Blackjack, Buy&Hold is a game you can play. It is simple and the odds are good, if you know how to play. But remember that "past performance does not gurantee future success". Just like Vegas, there are hundreds of games you can play on Wall Street. You may win some times, you may lose some times, but in the end the house always wins. And we, the people trying to build money for retirement, are not the house.
Posted by: bob in SC at 06/22/2010 04:26:21 PM
People! This is the greatest opportunity for buy and hold in our lifetimes. If you are 20+ years away from retirement, you shuld be buying dividend producing large cap multi nationals!