The pros and high frequency traders rule the world. Is the Buy & Hold Stock Strategy Officially Dead?

If you hold onto an investment for longer than five days, consider yourself the new millennium’s version of Benjamin Graham.

Source: Reed Business Information, Inc. Benjamin Graham, the economist often considered the father of value investing.

The average holding period for the S&P 500 SPDR (SPY), the ETF which tracks the benchmark for U.S. stocks, is less than five days, according to shocking statistics in analyst Alan Newman’s latest Crosscurrents newsletter.

“Given recent average volume, the SPY trades its entire capitalization and then some each and every week,” wrote the always-provocative analyst. “Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest.”

Analysts blame the hot potato market on the disappearance of the individual investor and the entry of the high-frequency trader. After three bear markets in the last decade, individual investors – especially baby boomers careening toward retirement – don’t have the risk tolerance to be burned once again.

“True liquidity has not come back and the pros and high frequency traders rule the world,” said Brian Stutland of Stutland Volatility Group. “Plus, if the average person ever comes back, then they won't have time to play all day long back and forth in the market. So, maybe buy and hold really is dead.”

Newman notes in his newsletter that the average holding period for all stocks was almost four years from 1926 through 1999. After a tech mania, a housing bubble, and the explosion in electronic trading, the average holding period sits at just 3.2 months today.

The decline in mutual funds and rise of short-term oriented hedge funds are also partly to blame for this trend, investors said.

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“From the hedge fund perspective, we are judged on monthly performance, and three months is a lifetime,” said Brian Kelly of hedge fund Shelter Harbor Capital. “Ask any hedge fund or mutual fund manager for how long do they believe they can underperform the market and I guarantee they will tell you, ‘One quarter.’”

In one of the most extreme examples of our day-trading, computer-driven investment culture, Newman unveils this gem: “In the three months from the beginning of March to the end of May, transactions in Apple comprised one of every $16 traded in the U.S. market, very likely the most concentrated focus on one stock in stock market history.”

How many of the human beings or machines behind those trades looked at Apple’s price-earnings ratio?

“I speak with retail investors every day and I can tell you that more than ever, they believe that the stock market is a casino for the large and well-connected investors,” said Mitch Goldberg, ClientFirst Strategy in Woodbury, NY. “Of course, different investment styles go in and out of favor every so often, so to be a long term investor, you’d need a ton of patience and very thick skin. Eventually, the Graham and Buffett way will be back in favor and I think that is what will encourage the retail investor to step back into the market.”

Click here for primer on today's market players

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Buy and Hold — Is It For You?

Let's take a look at what exactly "buy and hold" means. We'll also look at how long is long and when you should sell a stock.

What Does "Buy and Hold" Mean

It's an investment strategy that blends seamlessly with Fundamental Analysis. After you buy a stock, you hold on to it for a while even if its price bounces wildly. You sell only when you have good reason to.

You can see see how this is radically different from a market timing strategy — buy low, sell high.

This brings us to a very important question — how long is long?

Long is relative. From a buy and hold perspective, long would mean at least several weeks. Anything shorter than that would generally fall under another stock investing strategy called day trading.

If you've bought the stock based on the fundamentals, then you should sell only if you have very good reason to. And that brings us to the next important point....

When Do You Sell A Stock?

The best investors are divided when it comes to this question. At one end of the spectrum you have the Warren Buffett camp that says, "Our favorite holding period is forever." At the other end, you had Peter Lynch who held on to most of the stocks in his portfolio for a month or two at the most. His entire list turned over at least once a year. And, he had around 1400 holdings!

It's important to note here that these are big players with billions of dollars in investments. Different rules apply there.

Your decision to sell a stock should be based on the strategy you're using. Since we use Fundamental Analysis, here are our reasons to sell stock:

• When the price of a stock crosses its intrinsic value — the stock is now getting overvalued and with that comes the risk of a sudden drop in price. Time to lock in your profit and exit.



• You realize you made a mistake in your analysis — it happens every once in a while. You find something you don't like about the company or its management. Had you known that before you invested, you would have never bought the stock. If the reasons you bought the stock are no longer valid, it's best to sell. Remove the emotion out of the decision, admit you made a mistake, and sell. You will be better off.



• The fundamentals have deteriorated — the strong past financial performance of the company have now started going south. Evaluate the situation. If it doesn't look like the company will come out of the decline anytime soon, it may be time to sell.



• A better opportunity comes along — you find another company to invest in with great financials and a very attractive price. One small problem .... you don't have enough cash to buy a meaningful amount of stock. Can you sell one or more of the stocks you own that will free up some cash?

The buy and hold strategy does not mean owning a stock indefinitely. Believe it or not, selling a stock is much harder than buying a stock. You tend to get emotionally attached to the stock. It's hard to sell when the price has fallen steeply — you're always hoping that somehow the price will come back up again and you won't loose your money. It's hard to sell when the price rises — you don't want to get in the way of a good thing.

So again, let your stock investing strategy dictate when you should sell. Try and not let emotion get in the way. Remember ... you want to own the stock as long as you don't have a good enough reason to sell it. But if you do have a reason, sell it. Get it over with. Move on.

http://www.independent-stock-investing.com/Buy-And-Hold.html

Interesting interview by John Bogle.

John Bogle the creator of Vanguard Index 500 is worth always listening too. Recently Mark Cuban the owner of the Dallas Mavericks disputed the merits of long term investing. Watch this video interview in link below. One interesting component in the interview was the fact that ETFs are causing lot of market volatility as they make up 40% of trades in the market everyday. Understanding their impact is very important.

To make sure every $1 investment will generate $2000 in just 30 years ...

Fundamental analysts can have good dreams because they usually sleep well. If you are one of them, you don’t have to be afraid of daily stock price fluctuations. Why care so much for $1 to $2 per day price movements and uncertainties when you can get $100,000 30 years later almost certainly and do nothing? The ‘do nothing’ is what makes you an investor. Don’t you think so? Once you bought the shares, you will only sell them if there are fundamental changes; such as change in management or business model. Otherwise, continue riding on their profits and keep on collecting dividends or bonus issues by ‘doing nothing’.

Doesn’t it sound so peaceful?

"To make sure every $1 investment will generate $2000 in just 30 years, make sure you buy the stock at the lowest price possible."

The type of stock you would like to buy and hold forever