Modified Buy-and-Hold: Why it Still Works

Many investors believe that buy-and-hold is dead, that it is no longer is a viable investment strategy. They increasingly focus on short-term trading, from day trading to swing and position trading. The arguments in favor of short-term trading are solid:

Short-term moves are more predictable and easier to control: get in, make a quick profit, get out, wait out a pullback in cash, repeat.

Long-term investing does not work because companies' life spans have shortened. Very few companies can grow consistently for 30 to 40 years, as they did before, gradually innovating and expanding their markets. These days a successful product launch is often global and global competition makes it more difficult for companies to maintain a dominant market position for long, so stocks and the companies they represent come and go all the time. A company and its investors should be happy now if they can get two good years.

Modified Buy-and-Hold

However, a modified buy-and-hold (buy a stock and hold it for the duration of advance, anywhere from several months to several years) still works.

Price Anchoring

A stock doesn't zoom 1,000% overnight. It must travel a long way, with many pullbacks and consolidations. Suppose, you buy a stock at $20 after it has already doubled from $10. Those who bought at $10 are already happy to sell it to you for a quick double. At $30, the stock is up another 50%, and a chorus of analysts and gurus starts telling you that the stock is overvalued, that it cannot go up forever, that it is due for a correction... You yourself think that a 50% profit is nothing to sneeze at, start worrying about losing it, and sell to lock it in.

Mental Block

Mentally, we are not equipped to see a $20 stock go to $200 in one scoop. For a stock to keep advancing, it must keep dropping off old anchor price and creating new ones. That takes time. The longer you hold a stock, the less relevant an old anchor price becomes, and the easier it gets to hold longer - in fact, if anything, it gets harder to sell.

Profitable Holding

The key to profitable buy-and hold is holding for more profit. A stock that is declining or simply not performing as expected should be sold. May investors call themselves buy-and-holders to justify holding losing stocks that they hope will come back to let them break even. No amount of holding can turn a loser into a winner, and the only result of buying and holding a loser is that your loss gets bigger with time.

More from this contributor:

Stock Trading: When You Buy is as Important as What You Buy

How to Beat the Market Trading Zoomers

How to Gain an Edge in Stock Trading