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Friday, February 17, 2017
Buy-And-Hold Is Essentially Dead: Seeking Alpha
Many investors prefer holding their stocks for many years or decades, as they save precious time in this way. This strategy has offered excellent results for those who had the luck and the astuteness to invest in the right companies, e.g. the dividend aristocrats. However, in this article, I will analyze why it has become extremely difficult nowadays to hold stocks for decades. To be clear, I am not saying that no one can implement it successfully. The strategy has just become extremely hard to implement. Moreover, I am only referring to the investors who are striving to achieve their retirement goal. I am not referring to those who have easily exceeded their retirement goal and hence they do not mind underperforming the S&P 500v(NYSEARCA:SPY) by a wide margin.
First of all, it is worth pointing out the great advantages of buying stocks and holding them for decades. Investors who follow this strategy save thousands of hours from monitoring their holdings, as they do not need to follow every piece of information that is relevant to their holdings. Moreover, they avoid the stress and the potential mistakes, which are inevitable when a portfolio is churned on a regular basis. In addition, they minimize the cost of commissions and fees, which may seem innocuous but have a significant impact on long-term returns. Therefore, if some investors can achieve their desired returns by holding their stocks for decades, they should certainly pursue this strategy.
However, while this strategy has worked perfectly for a limited number of stocks in the past, there is no guarantee that it will keep working forever. Most Greek investors applied this strategy on Greek stocks, especially the four largest banks, which had an exceptional growth record and had always rewarded their long-term shareholders, regardless of their investment horizon. I remember one of my closest friends stating that he would keep his shares in the drawer and would not open the drawer for the next 20 years. Well, unfortunately the country went bankrupt and hence all the major Greek banks have implemented 2-3 extremely dilutive secondary offerings during the last 7 years. Consequently, the shares have essentially gone to zero. While some investors will claim that the shareholders of Greek banks did not do their homework, it is important to note that everything is obvious in retrospect but really difficult to predict in advance. Holding shares of Greek banks was the most guaranteed way to achieve great returns for decades.
Of course some individuals will claim that the above disaster will never occur to US stocks. Indeed corporate America has proved the best place to be invested. However, this is not guaranteed to last forever. For instance, US debt has climbed to 104% of GDP and keeps growing at a high pace. The debt of Greece was 120% of GDP when the country went bankrupt. Of course the US will not have the same fate as Greece. On the other hand, while every US recession has always proved short-lived and has always been followed by a spectacular rebound, this may not be the case at some point in the future. To be clear, I do not believe that US will experience a prolonged recession in the next few years but no-one can exclude that possibility over the decades to come. Most investors lost their fortunes during the Great Depression and there is no guarantee that such a disaster will never present itself in the future.
Even if the US never experiences a prolonged recession, there is another catch in the buy-and-hold strategy. Corporate America includes the best companies, which progress at an unprecedented pace thanks to technological advances. For instance, Amazon (NASDAQ:AMZN) has pushed numerous retailers into a distressed situation thanks to its relentless growth. To be sure, J.C. Penney Company (NYSE:JPC) and Office Depot (NYSE:ODP) had posted exceptional growth until a decade ago but their stocks have plunged 90% during the last decade. In a similar fashion, Sears Holding (NASDAQ:SHLD) has lost 95% during the last decade while Macy's (NYSE:M) fell 55% off its peak in 2015. Fossil (NASDAQ:FOSL) is a similar case. The stock had offered excellent returns for two decades, until about 3 years ago. At that point, the company started to feel the heat of the Apple (NASDAQ:AAPL) watch and its stock has dived 85% since then. All these were excellent buy-and-hold companies, as they had provided admirable returns to their long-term shareholders for years or decades. However, heated competition changed their trajectory and resulted in excessive losses for their shareholders. Therefore, investors cannot keep their shares in the drawer and close the drawer for decades anymore.
Investors should also note that the above investing disasters occurred during the ongoing 8-year bull market, which is the second-longest in history. Whenever the next bear market shows up, it will certainly unveil many more investing disasters, as it will put the most vulnerable and leveraged companies under severe stress.
Some investors will claim that the buy-and-hold strategy has worked remarkably well in the case of dividend aristocrats, such as Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and General Mills (NYSE:GIS). However, these stalwarts have stopped growing during the last 4 years due to increasing competition, their own size (which limits their growth potential) and the lack of new places for further expansion. Therefore, these stocks are likely to underperform the market in the long term, just like they have underperformed in the last few years. As mentioned in the introduction, while some investors have already exceeded their retirement goal and hence do not mind underperforming the S&P, most investors are striving to meet their retirement goal and hence they cannot tolerate underperforming the index. All in all, while the above stalwarts have proved excellent buy-and-hold stocks, they are not likely to maintain that reputation after one or two decades.
To sum up, technological advances and markedly strong competition in almost every sector have definitely changed the investing landscape during the last decade. Therefore, investors cannot hold their stocks forever, like they used to in the past. On the one hand, this does not mean that investors cannot hold some stocks for decades anymore. However, on the other hand, investors should continuously monitor all their holdings in order to determine whether they are worth keeping or their business model is about to incur permanent deterioration. Investors cannot buy-and-forget their stocks anymore.