Even in 'New Normal', Buy and Hold Still Beating Market Timers

Since equity markets peaked in 2007, macroeconomic factors have by and large been the driving force behind stocks. The U.S. financial crisis, the European debt crisis, China's slowdown -- these and many other macro issues have led investors to jump in and out of the market based primarily on their feelings about the global economy. Buy-and-hold investing is dead, many say, and the only way to make good money in stocks is to successfully time the macro moves.

But while a myriad of investors have been trying to do just that, few have been succeeding. In a recent Barron's column, Mark Hulbert, who for decades has been monitoring the performance of dozens of investment newsletters through his Hulbert Financial Digest, looked at returns since the October 9, 2007 market peak of the more than 100 market-timing newsletters and web-based advisors monitored by HFD to see who correctly called both the market top in 2007 and the market bottom in 2009 (or at least came close to it). He found that of 140 strategies tracked by HFD, only 15 had significantly lower equity exposure a month after the 2007 top. Of those, just six had markedly higher equity exposure a month after the 2009 bottom.

What's more, the six that did meet the timing criteria gave other buy and sell signals in the intervening periods "that had the unfortunate effect of frittering away the gains they otherwise would have realized if they had left well enough alone," Hulbert says. He did say that about 25% of the market-timers he tracks have beaten the market since stocks hit their 2007 high, but "none of them did so by getting out at or near the top and getting in at or near the bottom."

Just as those advisors have struggled to successfully time the market, so too have individual investors. Over the past 20 years through December, the average individual stock mutual fund investor earned 4.25% per year, while the S&P 500 returned 8.21%, The New York Times recently reported, citing data from Dalbar Inc. A $10,000 investment at 4.25% annualized would be worth $22,989 after 20 years; at 8.2%, it would be worth $48,456 after 20 years. The gap in performance is due in part to the fees mutual funds charge, but also to investors making emotional decisions to jump in and out of the market at inopportune times. "They get excited or they panic, and they hurt themselves," Dalbar President Louis S. Harvey said.

Given data like that, I prefer to use a long-term, buy-and-hold strategy, and stick with it during good times and bad. That has paid off for me over the long haul, and, despite all of the buy-and-hold-is-dead talk, it has paid off since the 2007 market peak. Take my three top-performing Guru Strategies (investment models based on the approaches of history's greatest investors) over the long haul. While the S&P 500 is basically flat since that 2007 peak, my Benjamin Graham-inspired portfolio is up over 30%; my Motley Fool-based portfolio is up more than 40%; and my Kenneth Fisher-based portfolio, while not as prolific as those first two, is up about 9%. These portfolios have all been 100% invested in stocks throughout the entire period -- through the Great Recession and financial crisis, European debt crisis, Chinese slowdown, fiscal cliff, and sequester. They've had ups and downs to be sure, but they've proven that good strategies can produce strong returns if you stick with them through rough periods.

What stocks do these approaches like right now? Here are a few of their favorites. (Keep in mind that you should invest in stocks like these as part of a diversified portfolio.)

Geospace Technologies ( GEOS ): This $1.4-billion-market-cap Houston-based firm makes scientific instruments for the oil industry that use seismic data to find oil and gas. My Fool-based model (inspired by Fool co-creators and brothers Tom and David Gardner) likes that it grew earnings by 150% and sales by 80% last quarter (vs. the year-ago period). It also likes that the firm has no long-term debt, a 0.43 P/E-to-growth ratio, and a strong 94 relative strength.

National-Oilwell Varco, Inc. ( NOV ): Also based in Houston, Varco makes oil and gas drilling parts. The $29-billion-market-cap firm is a favorite of my Graham-inspired strategy. It likes the firm's solid 2.78 current ratio and $10 billion in net current assets vs. $3.1 billion in long-term debt. It also likes Varco's price: Shares trade for a reasonable 14 times three-year average earnings and 1.43 times book value.

HollyFrontier Corp. ( HFC ): Formed when Holly Corp. merged with Frontier Oil in 2011, Dallas-based HollyFrontier ($10.6 billion market cap) is one of the U.S.'s largest independent petroleum refiners. It has operations in the Midwest, Southwestern, and Rocky Mountain regions, operating five complex refineries. It's a favorite of my Fisher-based model. Fisher pioneered the use of the price/sales ratio ( PSR ) as a valuation metric back in the mid-1980s, and HollyFrontier's PSR of 0.52 comes in well below this model's 0.75 upper limit. The strategy also likes HFC's reasonable 22% debt/equity ratio, and $3.25 in free cash per share.

Guess?, Inc. ( GES ): Los Angeles-based Guess makes trendy jeans and a variety of other clothing and accessories. It recently announced disappointing fourth-quarter results, and its shares took a hit. But my Graham-based model thinks the hit was too big. It likes the $2.1-billion-market-cap firm's 2.84 current ratio, and its $729 million in net current assets vs. just $8.7 million in long-term debt. The strategy also likes that Guess shares trade for 11.1 times trailing 12-month earnings.

Homeowners Choice, Inc. (HCI): Tampa-based Homeowners ($262 million market cap) is the parent of Homeowners Choice Property & Casualty Insurance Company, which provides homeowners insurance in Florida. It posted some impressive growth in both earnings (92%) and revenues (40%) last quarter, part of the reason my Fool-based strategy is high on it. A few other reasons: the firm's high and rising profit margins (18.5%, 10.6%, and 7.9% over the past three years, starting with the most recent); its 93 relative strength; and its 0.24 PEG ratio.

I'm long GES, HCI, HFC and GEOS.

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

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

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.