Busting the Myth of Buy-and-Hold Investing

I was watching the show ‘MythBusters’ the other night (because I’m kind of geeky that way) and I found myself thinking, “You know the financial world could really use its own MythBusters type of program.”

Further confirming my geek status, I quickly gave myself the title of program director of this completely non-existent program and slated the first four episodes to be entirely dedicated to busting open the myth of buy-and-hold investing.

‘Four episodes?’ you might ask. Yes, at least four. I think it’s going to take that many to shake investors of the notion that this grand idea Wall Street has been pushing for decades doesn’t actually yield the touted results.

As my first piece of evidence, I will offer up famed investor Warren Buffet.

By all accounts, Buffet is a skilled investor. His success in the market (i.e. HUGE and consistent returns) have been extremely well-documented and chronicled. However the tale that Wall Street tells of Buffet’s approach — one of mythical savvy in picking the right stocks and holding on to them for the long haul — is far from the truth.

In fact, a team of academics led by John Hughes from the University of California at Los Angeles recently analyzed the quarterly filings of Buffet’s company, Berkshire Hathaway, for the years 1980 to 2006. The filings offer a detailed tracking of Buffet’s actual trading activity. And you know what it revealed? Buffet’s median holding period during that time was…drumroll…one year.  In fact, 30% of his investments were sold within six months and only 20% earned a spot in his portfolio for more than two years. That, my friends, is not a buy-and-hold approach but rather active trading and management. (If I had a special effects budget for my program this is where I’d blow something up. Something big.)

With the dust of this revelation (and awesome explosion) settled, I’d now turn my program’s focus to this question: given that one of the world’s greatest investors doesn’t actually buy-and-hold, why does this myth persist? While there’s no single agreed-upon reason, there are a couple of good theories.

The first is that mutual fund companies basically discourage it. Why would they do that? Well, mutual fund companies only make money while the client is invested. So let’s say the market takes a turn and you pull your money for, say, just three months. At the end of that year the mutual funds you-based revenue would be cut 25%. Now imagine if EVERY client had that idea…

The second theory is similar to the first except the key advocates of buy-and-hold here are Wall Street trading firms. While they stand to make some money on initial investment sales, there’s no guarantee that you’ll bring that money back when the market improves. So in that sense, when Wall Street says buy-and-hold works, it does. But only for them.

Theories aside, the reality is that in the world of investing, discipline is what yields the best return. You do your research, you buy smart. You hold onto what’s working and you cut loose those investments that aren’t turning a profit.  Conclusion: Buy-and-hold is a bust.

Jason MacGregor, Principal of Minich MacGregor Wealth Management – in Saratoga Springs, is a fee only Advisor who provides investment advice to individuals and individual company retirement plan participants. He can be reached at 518-499-4565, jason@mmwealth.com, or Twitter @mmwealth.