After the market downturn, does this investment strategy still make sense? Maybe more than ever.
On June 9, 2010, Wallace Forbes, president of the Forbes Investors Advisory Institute, hosted the latest quarterly edition of the Forbes Financial Round Table. A panel of three investment advisors discussed current economic trends and investment opportunities with Wallace Forbes and Vahan Janjigian, Forbes chief investment strategist. The three investment advisors include Hilary Kramer, chief investment officer of A&G Capital Research; Mike Holland, chairman of Holland & Company; and Robert Stovall, managing director of Wood Asset Management. The panelists discussed the state of the buy and hold investment strategy.
Vahan Janjigian: Hilary, you just made a comment that called up a question in my mind when you said it's the kind of stock you might want to own for 20 years. I'm wondering, are there such things anymore? We've seen that the stock market has done, you know, incredibly poorly over the past 10 years or so. So buy and hold investing has not really been a very profitable strategy.
I think investors really do need to be prepared to sell. I know in the past there was a lot of criticism of this concept of market timing. The academics said you can't time the market, therefore you should just buy a diversified portfolio and buy and hold stocks for the long run. This certainly did work for people like Warren Buffett, but we've seen over the past few years that this strategy can really backfire. So do you think investors need to be prepared to sell?
Hilary Kramer: Oh absolutely. My time horizon is two days to six months and that has to do with the nature of managing institutional money. It really fits with what we have going on today. Some of those pharmaceutical companies you could have held a company like Bristol-Myers ( BMY - news - people ) or Pfizer ( PFE - news - people ) for the last 12 years and you're down on your money even though you have that dividend yield. So I absolutely agree. However, there are a few small companies that are growing. If you can find them, get in now and wait and take it up to the next level. That's also an opportunity.
Robert Stovall: I'd like to jump in here, Wally. Everything that we are talking about now requires more work on the part of the people doing investing whether they're individuals or teams. You've got to check on everything they are doing and what they're not doing and how well they're doing at what they're doing. You just can't get an idea or listen to somebody talk about a name or two and then go off and do make a decision.
So what Hilary was talking about, and what we're all talking about so far this afternoon, is that to do your job correctly you have to be very, very careful and see where they are and where they're not. And where they could go wrong. What you do wrong that can hurt more than the good things you do can help.
Psychologically, people are take their losses much more seriously than the joy they get out of their winners. And in this environment that we're in with so many lost days, lost weeks, on the verge of a lost decade, the disappointments hurt. And it probably impacts your future performance unless you adjust your expectations and accept the way things change rather than dream about the old days. And it will probably take longer to make a decision than it used to.
Wallace Forbes: Do you think that individual investors are by and large able to do the kind of homework that you're talking about?
Robert Stovall: I think many of them are if they devote the time to it. Many of them are disappointed with their professional money managers. Unless there's some motivation to put some time in on their own, investors may investigate their money managers more carefully and say, "Gosh am I with the right team here?" What I'm trying to say is put in more time, do a little more homework on your own before you make a decision.
Mike Holland: A different way of looking at that today is that most the numbers range from 60% to 85% of everyday trading is by hedge funds, and much of the rest is made up of computerized trading programs. So there's very little left coming from individuals who were around in the dot-com boom.
When many individual investors used to come up to people in our practice and say, "Why would I even bother with you because I can buy Intel ( INTC - news - people ) and 3Com ( COMS - news - people ) and these things all by myself?" I think most of the people who used to do that are no longer doing this. That's what the numbers are reflecting.
As Vahan said, the last 10 years have been truly ugly. I think that if you look at any of the history of any 10-year period that was as awful as this one has been, particularly as it related to bonds, the next 10 years inexorably we were surprised in the other direction. And this exactly the time when the individual investors don't do the work you just asked Bob about.
I think what's happened is it's made valuations go crazy to the downside--whether it's the food companies or the large technology companies or the small companies. It's virtually across the board. I think over the next 10 years, now that buy and hold investing is totally out of sync with anyone's professional sanity, it's probably an intelligent thing to look at.
From Forbes published on J06.22.10, 03:30 PM EDT