Buy and Hold will never be dead
The media has been slamming investor Warren Buffett throughout the recent market turmoil for his time tested buy and hold investment strategies. Traders are ripping apart the idea of a buy and hold approach saying that it has died and the new emphasis should be on short term trading rather than long term investing through a buy and hold method.
But fundamentally there is simply no way that a buy and hold investment strategy could ever disappear. At the most simple level, companies use the stock market as a method of raising quick cash by liquidating a portion of their company for cash.
The buy and hold investment strategy is rather simple. You’re buying a portion of a company that you believe will appreciate in value. Short term investors have a different approach, they’re looking for fluctuations in the price of stock and companies rather than changes in the fundamental value of corporations.
What traders are saying about the buy and hold strategy would be true IF the stock market was not how companies value themselves. Mergers and acquisitions take place on the stock market where one company buys up the entirety of another company’s stock. Acquisitions bring the fundamentals back the the market, companies are buying other companies for a determined price.
Rarely do companies ever complete a merger at the current market price for shares of stock. This is where the buy and hold approach maintains merit; instead acquisitions take place at a price that pleases the shareholders of the company on the auction block and a price suitable to the new owner. Even with a stock price equal to 3 times earnings, stockholders are going to want at least a PE of 10. The value of the assets of the company is not set by the market.
For as long as there are companies buying others and making fair market offers the buy and hold investment strategy will never die. In fact it will only get better for the buyout buyers; those who plunge into securities before the buyout happens.
I do agree that buy and hold strategy will never die. Cut out all this speculation and short term rubbish and you get a few simple rules. Companies will ALWAYS have equity release as an option of capital raising. Investors will ALWAYS (maybe more or less given the economic period) be willing to invest in companies that are run well (especially when speculation destroys the value), Companies will ALWAYS exist, because they produce everything.
The risk appetite will change depending on the climate, but the fact is there will always be equity and an opportunity to benefit from well understood investments.
What i disagree with is the fact that the main buy and hold reason is looking for a buy out. If the company bought all the shares up in the private market (they have to declare every so many percents), the share price would naturally drift up as demand outstrips supply. - I think shares have become too speculative and ignore what a fundamental investment is not about.
Companies pay a dividend (when times are good) to shareholders that creates a yield. Like any investment (bonds, buy to let housing), initial capital is put down for yield and underlying profitability. How many years until my initial capital is repayed? What is the underlying profit of the business?
Buy and hold isn’t dead, it is a currently dormant strategy because of the fundamental view that the economy is going to get worse -
How can RBS for instance be worth 55p if their fundamental business of loaning out savings does not work…
Lazy Buy & hold is probably dead, Constantly re-balancing with buy & hold is not dead.
“Buy and Hold will never be dead” - I totally agree. Anybody who thinks it is, obviously does not understand the meaning of it and probably does not understand the difference between buy and hold and buy and forget.