In today's high-paced investing world, you might think that
buy-and-hold investing is a long-lost relic from
a nearly forgotten age
. But the investing style that Warren Buffett and countless other
long-term investors have used to reap huge gains over the decades
is far from dead -- and rather than letting it weaken your
resolve, pundits who pronounce buy-and-hold investing dead
actually make it
easier
for long-term investors to do their jobs.
The rise of the machines
Recently,
high-frequency trading
has had a huge impact on the stock market. As a CNBC article
(titled "Is the Buy & Hold Stock Strategy Officially Dead?")
noted yesterday, figures from stock analyst Alan Newman show that
exchange-traded funds have made it easier than ever for
algorithm-driven machines to work their magic. The article cites
the huge volumes of shares of the
SPDR S&P 500 ETF
(
SPY
) that trade every day, producing an average holding period of
just
five days
. Looking more broadly at the market, the average holding period
for stocks overall has shortened from four years prior to 2000 to
just over three
months
now.
Predictably, this has made the general public wary of
investing in the market. Seeing institutions tripping over
themselves to grab every penny of profit they can at the expense
of slower-paced investors has convinced them that the Wall Street
game is rigged.
There's some truth to that belief. But it's only true if you
force yourself to
play Wall Street's game
. Fortunately, you don't have to do that.
Time is on your side (yes, it is)
Just last week, fellow Fool Matt Koppenheffer gave investors
four tools you can use
to beat uncertainty and rising complexity in your portfolio. I
highly recommend reading Matt's article, because all four of his
suggestions are extremely useful if you're planning on investing
for the long haul.
But the thing that's most important for buy-and-hold investors
is the last of Matt's suggestions -- namely, to use what he
referred to as time arbitrage. He notes that short-term
challenges often make investors nervous about a stock even when
its long-term prospects aren't really under any big threat.
Taking this concept a step further, the things that
high-frequency traders are looking for often bear no resemblance
whatsoever to what long-term investors seek. With many trading
systems benefiting from volatility, stocks with a high degree of
uncertainty can be especially valuable. That's why
First Solar
(Nasdaq: FSLR) has had heightened daily volume for some time now;
troubles on the solar front have investors more nervous than
ever, and traders can pick up on that nervousness and use it to
their advantage. The same trends apply to
Netflix
(Nasdaq: NFLX) , whose business model is coming under question,
as its latest results included a quarterly loss and a drop in
revenue. Materials-related stocks
U.S. Steel
(
X
) and
Alpha Natural Resources
(
ANR
) have also been held captive to news about the broader economy
lately, and so share volumes have picked up. At their recent pace
of trading, all of these stocks have their entire float change
hands within 20 trading days or less.
It's essential to avoid trying to meet these quick traders
head-on. View buying and selling stocks the same way you would a
transaction involving your car or your home -- something you'll
want to do from time to time, but
not
something you could afford to do day in and day out.
Why you don't have to play
Buy-and-hold isn't the same thing as buy-and-ignore, so you
shouldn't feel like the only way to win against Wall Street is
never
to change your mind about a stock. But you have to pay attention
to the
right
information -- not falling prey to emotionally driven
decision-making but instead focusing on the fundamental factors
that affect a stock, an industry, or even an entire economy over
time. That's your best way to filter out the noise and take
action with things that truly matter.
The key takeaway from the proclaimed death of buy-and-hold is
that the mass of investors have given up on what has
traditionally been an extremely successful way to make money in
the market. That leaves the field wide open for those who measure
performance in market-cycles rather than months or
milliseconds.
We've got some ideas for stocks that you can use for just such
a strategy. I invite you to read the Motley Fool's special report
on investing for retirement, where you'll find three names of
stocks that could give you everything you want in a long-term
investment. Just click here and start reading your free copy
right now.
Fool contributor Dan Caplinger enjoys thinking about the
longer-term view. He doesn't own shares of the companies
mentioned in this article. You can follow him on Twitter
@DanCaplinger. The Motley Fool owns shares of Netflix and has
sold shares of SPDR S&P 500 short. Motley Fool newsletter
services have recommended buying shares of Netflix and First
Solar. Try any of our Foolish newsletter services free for 30
days. We Fools may not all hold the same opinions, but we all
believe that considering a diverse range of insights makes us
better investors. The Fool's disclosure policy always has time
for you.
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