Buy and Hold is Overrated

At this juncture, as the news flow from pundits and economic forecasters grows more and more shrill and jarring, an ever-present “die-hard”, core group of investment believers continues to espouse the (seemingly) timeless wisdom of “Buy and Hold”. They proclaim loudly and in a resounding tone that one should simply buy and hold and ride through the intense and increasingly frequent bouts of volatility, with the expectation that at the end of the day (some 5-10 years later no doubt), one will come out ahead with gains eked from patience and perseverance. My take on all this is – it’s overrated and very misleading. I will proceed to explain why in the next few paragraphs.

The concept of “Buy and Hold” (BAH) relates to buying shares of companies and holding them through thick and thin, all the while with the belief that as long as one maintains a long-term view, one will emerge unscathed. However, the concept is flawed due to the fact that an investor cannot simply BAH (which I call Buy and Forget), as the business of the company may not be able to withstand the vicissitudes of time. In case any reader thinks that I am referring to small or mid-cap companies, this holds true as well for blue chips. Just ask those people who purchase shares of Creative Technology during the dot.com boom in 1999-2000; as Creative was then the bell-weather technology stock and was one of the blue chips. Yet, competition from Apple in recent years has eroded their market leadership, and after the success of their Sound Blaster Pro, they had never managed to come up with a world-beating invention. Instead, Apple Inc. has now taken over as the tech company of choice, as their world-beating iPod and current iPad take the world by storm. An investor in Apple’s shares would also have to follow the company closely to see if future inventions and products can emulate the success of their previous products; otherwise the lofty valuations placed on the optimistic expectations may just crash back to earth.

A more proper term which I have come up with should be “Buy and Monitor” (BAM), instead of BAH. Holding a portfolio of different stocks is akin to investing in a myriad of different businesses (recall that shares represent part ownership of a business), thus one should constantly keep abreast of the latest developments relating to the business and industry surrounding these companies, in order to ensure that your original intention for investing in them remains sound. The underlying business should be healthy and generating good profits and cash flows to qualify to remain as a sound investment, as espoused by the timeless principles of value investing. If the business does well, it becomes more valuable and people will be willing to pay more for a piece of the business; hence this will all eventually translate into a higher share price.

BAM is seldom mentioned in great detail because most publications and newspapers prefer to talk about the economy or the stock market, rather than individual companies. Anything newsworthy is featured for a day or two and then promptly forgotten, but the investor should remember that he does not need constant news feeds and updates in order for his investment to do well. In fact, I dare say that a lack of news may actually represent good news, as this means the business is on track and not experiencing any mind-numbing hiccups or difficulties.

As an example, I monitor the business fortunes of the companies in which I own shares rather closely, and I definitely do a quarterly check on their financials and business health (where possible, as some do not release quarterly numbers). In addition to all this, one must also constantly read up news on the industry affecting one’s investments, and also personnel movement as this may also impact how one’s investment performs. For example, MTQ recently announced a leadership shift as Mr. Kuah Kok Kim stepped down as CEO, to be replaced by his son Mr. Kuah Boon Wee.

In conclusion, BAH is seriously over-rated as many commentators and tired pundits continue to extol the same advice over and over again, seemingly mindlessly. If we delve a little deeper, we would realize that BAH was responsible for many people losing their fortunes due to laziness and sloth, as they simply bought shares without due care and concern for the underlying business, and let these shares languish for the next few decades. This is not just a lost cause, but is also responsible for tying up capital which could otherwise be re-deployed for better growth.