Investing and the Myths of Buy And Hold!

One decent little book on investing was written by Curtis Montgomery, Sun Tzu On Investing by Curtis Montgomery

Applying the timeless pearls of wisdom and strategic insight from Taoist warrior and philosopher, Sun Tzu, this book simply makes great sense for everyone.

To win without fighting is best. Go forth armed without determining strategy, and you will destroy yourself in battle.

Much strategy prevails over little strategy, so those with no strategy cannot but be defeated. Therefore it is said that victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

To win without fighting is the best.

As Master Sun says, "When you know yourself, you are able to protect yourself."

Ask yourself some tough questions about why you want to invest in stock markets, here's a list to get you started.

• What are my financial goals throughout my life.
  
• Why should i buy stocks instead of fixed deposits, bonds or mutual funds?
  
• Based on my personal/family budget, how much capital can i deploy into stocks?
  
• Do i have the stamina to survive bubble and panic markets?
  
• Do i have the desire to understand businesses and investigate management?
  
• Do i have the patience to wait for business values to be expressed in share price?
  
• Can i emotionally detach myself from the daily market "buzz"?

These are the simple basic commonsense personal financial planning issues mentioned by Montgomery in his book (pg 4).

So why is personal financial planning so important?

Remember the blog entry: Is Market For Suckers?

Let me reproduce what is mentioned in the originating blog again.

• Its amazing how life intervenes. Kids, whatever. its a fortunate few that can just shell it away and never touch it. Your “horizon” hits a dead end when you have to put money into a checking account. I have never seen any investing research that deals with random withdrawls that represents real world. And boy oh boy, if life hits you hard when the market is down, you make a withdrawl and you wont ever catch up.

If you do not plan your financial planning well enough, there is always a possibility that sometime in the future an incident might occur requiring some emergency funding. And if it does happen, would you then withdrawl from the stock market?

And as mentioned in the blog, what if this incident happens when the market is down?

Would the forced withdrawl cause a huge damage to your investment?

Is how your investment could be hampered by your own doing?

You could buy a good stock at a good price, but if you are forced to cut short on your investment before the investment could bear fruit for you due to poor personal financial planning, then the chances of you finding success in the stock market will be severely hampered!

Think of every footy match.. :P

Will it do your team any good if you are forced to play each match with 3 play players short?

Sooo.... if you cannot and do not "know yourself, then how are you are able to protect yourself.?

Yes?

Let me repeat Sun Tzu teaching one more time..

• To win without fighting is best. Go forth armed without determining strategy, and you will destroy yourself in battle.
  
  Much strategy prevails over little strategy, so those with no strategy cannot but be defeated. Therefore it is said that victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

So what is Investing?

Is it Buy and Hold or Buy And Get Old?

BUY and HOLD.

Two of the most misunderstood simple words in the share market.

For an investor, what is a BUY? here's some stuff for one to ponder.

• Is any stock a BUY?


• Does a have stock have a price where it is deemed a BUY?


• Are all good stocks worth a BUY at any given price?

What is HOLD?

Hold means hold, not letting go.

Is this really applicable?

Once we get a good stock at a good price, do we hold it forever and ever? What if...

• The stock we had bought b4, no longer resembles the same stock. do u wanna HOLD? The papaya tree u planted, which gave u all the juicy and sweet papaya no longer bear fruits, do u still keep (HOLD) the same tree? don't u wanna plant a new one?


• Talking about papaya trees... trees they get diseases.... how?
  What if it contracts a deadly disease, do u just HOPE that things wud get better or are u gonna realise that the tree is a goner? Like in business, if something happens to the business model of the company, and business starts to deteriorate, are u gonna recognise the potential risk in your investment or are u gonna just HOPE that things would get better?


• If someone offers u a ridiculous high price for your prized holding, do u wanna HOLD for the sake of the HOLDing principal or do u wanna take their money? for example, u got a dollar for a nickel, and now someone wants to offer u twenty dollars for that nickel. How? Is it a HOLD or is it a ...


• Now back to that papaya tree. Now if the papaya tree is still consistently giving u loads of papaya, which are still as sweet and juicy as ever, what do u wanna do with it? Dun u want to continue HOLDing on to it forever and ever.... until....

So what you think of BUY and HOLD?

And then there is the myth of long term investing.

The myth of buy and hold .

In the book Bull! by Maggie Mahar she explains how market players were taught to buy and hold their stocks for a longer term based on the then investing bible stocks for the long run by Jeremy Seigel, a professor from the famous Wharton School. (Never heard of Seigel? He's the one that Charlie Munger famously called as Demented during Berkshire Annual meeting in 2006. Charlie's exact words "I think he’s demented. He tries to compare apples and elephants in making accurate projections.")

Folks were made to belief that if you bought a stock and held it long enough,the stock investment would have outperform all other investments.

Seigel used stocks such as Kodak, Polariod, Avon, Merk and Texas Instrument as the example. Dubbed the Nifty Fifty they were the equivalent of the Microsofts of today.

Seigel declared that if an investor bought these stocks and held it long long term (ze buy and hold) near the end of 1972 and held on to November 2001, the investors' return would average out some 11.76% a year. (see why the investing public were seduced so much by this Buy and Hold theory?)

Now Steve Leuthold, a venered Minneapolis money manager, had a research which totally disagreed and contradicted Seigel's view point.

According to Leuthold, Seigel's hypothetical example ASS-U-MEd that an individual who invested in these Nifty Fifty stocks in 1972 had divided his portfolio evenly among the fifty stocks, putting 2 percent of their savings into each company and even if these group of stocks plunge, the investor would still rebalanced their portfolio each month for all these 19 years, cashing out on his profits and then adding money into the losers (fuyoh! Would you accept and follow such an investing strategy? LOL! No wonder good old Charlie reckons that he's demented!) so that each stock position remained exactly at 2 percent.

Well, according to Leuthold (me too), such exercise is 'wholly unrealistic' to imagine that anyone would plow the gains from say Merck back into a loser such as Polariod, Burroughs or Xerox, year after year.

(Ahh.. u see Merck climbed a whopping 382%! .. and according to Leuthold, if this exercise did not include Merk, ie the investor failed to pick Merck into their portfolio, their portfolio in the long run would have sank by 12%. Err stock picking is important mah!)

Leuthold pointed out that from 1972 to 1982 the 10 worst performers in the group lost between 37% and 75%.

With losses that much, the commonsense question is that who would continue to send good money after bad money each month, each year?

(make sense mah! tiok boh? Who on earth would put more money into a stock whose business is losing more and more money each year?)

And Leuthold argued that the investors who bought such stocks in 1972 would surely have been discouraged long before stocks started picking up again in 1993.
And according to Mahar, these investors would probably have dumped their fallen angels, probably at a much lower point than what Leuthold numbers had suggested.

(much of what's written is based on pages 41-42 of the book Bull )

Here is a good review of what Mahar wrote:

How did it happen that the very real risks of investing in stocks were forgotten? Mahar explodes the myth of "stocks for the long run," explaining how the market's promoters crunched the numbers to create the illusion that if an investor stays in the casino just a little longer, he is guaranteed to come out a winner. Casting Warren Buffett in a new light, she explains how a value investor is, in the end, a long-term market timer who understands that success depends on how much you pay when you get into the market -- and when you get out. By putting the bull market of 1982–1999 in a larger historical context, she shows how, over time, longtime bull markets beget longtime bear markets.

The future defies prediction, but the history of financial markets makes one thing clear: markets always revert to a mean. Taken as a single story, Bull! is both an illuminating history and a cautionary tale about investing. Analyzing the economic and psychological forces that drive financial cycles, Mahar shows how an extraordinary influx of cash and credit, combined with the obsessive attention of a new financial media, created a cult of equities. Challenging the notion that stocks always outperform all other investments, she reveals why many of Wall Street's most experienced investors believe that the 21st-century investor needs to throw out the old rule book and make a new beginning as he plans for his financial future.

No investor should keep his or her money in the stock market without first reading this book.