Avoiding the 3 Pitfalls of 'Buy & Hold' Investing

Rumors of the demise of 'buy & hold' investing are greatly exaggerated, to say the least.

Purveyors of market timing would like us to believe that this investment strategy is no longer relevant to the current market environment.

Stocks have continued to struggle in the face of various challenges, ranging from elevated inflation and rising interest rates to geopolitical uncertainty in Europe and Asia. Even signs of an end to the Fed’s tightening cycle have not been able to lift sentiment, with many in the market preoccupied with recession risks for the economy.

The resulting stock market investing experience for many of the thousands of new investors that entered the market over the last few years has been nothing short of disappointing.

With this all-around sentiment negativity leaving most stock market boats adrift, investors are at risk of reaching the wrong conclusions from their recent failures and discarding long-held investing beliefs, including the virtues of ‘buy & hold’ investing strategies, as no longer relevant.

It is important to remember that long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it has ever been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of a 'buy & hold' strategy over any other investing approach.

But to adequately benefit from this time-tested and proven strategy, investors need to guard against three major pitfalls. Here they are:

1) 'Buy & Hold' Doesn't Mean 'Buy & Forget'

Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.

Buffett is famous for keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well informed of what is going on with each of their holdings to make sure that the primary reason(s) why they picked the stock(s) was still valid. This helps them avoid unnecessary changes.

Let me give you an example from the Top 10 Stocks for 2022 portfolio that follows a calendar year ‘buy & hold’ strategy. The portfolio did well, outperforming the broader market more than 2 percentage points through December 15th. But one of the 10 stocks, Albemarle (ALB), lost more than a quarter of its value from January 3rd through March 7th, 2022.

I didn’t ignore the sell off, but my due diligence convinced me that the weakness was nothing more than a function of broad market sell-off and that our long-term thesis still remained intact. Our level-headedness paid off, with the stock outperforming the broader market by more than 17 percentage points through December 15th. Tetra Tech (TTEK), another Top 10 for 2022 stock, lost roughly a quarter of its value through the first three weeks of January 2022, but eventually recovered and end up outperforming by more than 8 percentage points through December 15th.

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2) Don't Fall for the 'Buy What You Know' Mantra

Guard against the simplistic beauty of the 'buy what you know' mantra; another one of those skin-deep lessons learned from Warren Buffett's investment style.

Adherents of this 'philosophy' load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years.

Being familiar with a company's product(s) is a useful, but not necessary, starting point to 'knowing' the stock as an investment opportunity. The decision to buy the company's stock should follow a thorough, due diligence process that gives you a solid appreciation of the company's prospects, competitive position and the proper value of its stock.

Let me give you the example of Applied Industrial Technology (AIT), a stock that we picked for the Top 10 for 2022 portfolio. Most of us would never come across this small but otherwise leading operator in the industrial supplies niche, but that didn’t mean I couldn’t evaluate the company as an investment opportunity. The stock became a big success, outperforming the broader market by more than 43 percentage points, given its entrenched position in the supply chains for its industrial clients. We correctly saw the mission-critical nature of Advanced Industrial’s supplies to customers’ operations shielding its business evolving macroeconomic forces.

Agilysys (AGYS) is another example from the 2022 portfolio that proved to be an even stronger performer, outperforming the S&P 500 index by 79 percentage points through December 15th, but this software vendor to the hospitality industry is hardly a household name.

Studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks.

3) Stick With a Plan

Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change.

I am not suggesting that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the market.

If you expect a major economic downturn in the coming 12 - 18 months, your choice of investments would be very different from someone looking forward to a goldilocks-type scenario.

The U.S. Fed was getting ready to take on inflation as we were putting together the Top 10 Stocks for 2022 portfolio. We had a favorable outlook for consumer spending, corporate profits, interest rates and the broader economy. Even though we misread the extraordinary Fed tightening that was to come in 2022, our selections of diverse off-the-radar stocks for the portfolio that enjoyed unique competitive advantages in their respective spaces helped us succeed in the end.

In the absence of a crystal ball, we are bound to get some things wrong. But you must stay nimble and flexible enough to adjust your positions should your outlook change, as we did in 2022.

Putting It All Together

Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. We do the same in our annual 'buy & hold' portfolio that we create and maintain every year. We call it Zacks Top 10 Stocks, a portfolio featuring 10 stocks that I personally select and then actively monitor on your behalf. We are about to come out with Zacks Top 10 Stocks for 2023.

We construct this portfolio by first taking a look at the economic and earnings outlook. Then we narrow in on the industries that we believe will outperform and stay away from the others. From there, we use our proprietary stock-rating system to help select the best stocks in those favorable groups.

This stock selection process has stood the test of time, producing strong returns in good times and bad. Since 2012 when I started managing this service, the Top 10 portfolios tripled the S&P 500. While the market gained +270.2%, Zacks Top 10 Stocks skyrocketed +835.6%.¹ Even in the very difficult market of 2022, the Top 10 portfolio outperformed the S&P 500 index by 245 basis points.

High-Potency Stock Picks for the New Year

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The portfolio will be released on Tuesday, January 3. And please note, the best way to tap into this long-term investing opportunity is to get in on the ground floor. These picks are time sensitive and the sooner you invest, the greater their potential gains.

Here’s a quick peek at three of the stocks I’ve lined up...

• Fitness beverage company is floating on $727 million in cash, and it’s debt-free. A recent distribution deal with an industry giant looks to accelerate its double and triple-digit growth in each of the last 6 quarters.

• This is my play on agriculture, a sector in urgent and ever-increasing demand, especially in developing countries. Products for greater crop yields are driving net sales and revenue skyward.

• Spending for education systems was up even before the pandemic. I’m targeting a company with a sterling reputation and best-in-class products. Sweeping past many competitors, it’s generating a ton of cash flow.

The New Year brings a host of challenges and opportunities for the investing public. But rest assured that the stocks I’m picking for 2023 fully take into account what lies ahead.

Remember, since 2012, forward-looking Zacks analysis and careful monitoring has enabled our Top 10s to triple the S&P 500 index.¹

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Happy Investing,

Sheraz Mian

Sheraz Mian is Zacks’ Director of Research, and determines the most valuable data to use for assessing winning stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and since 2012 has personally handpicked Zacks Top 10 Stocks.

¹ As of market close 11/30/2022. The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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