Is Buy and Hold Strategy dead? (my strategy for long term growth stocks)

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Is Buy and Hold Strategy dead? (my strategy for long term growth stocks)

Post  Max on Fri Oct 08, 2010 9:06 pm

Being the cautious, risk-averse, and fundamentals oriented guy I am, I often find myself agreeing with the value camp: The stock price will eventually revert to the underlying business value. However, one strategy I have never liked is "buy & hold". The philosophy is founded on the assumption that it is impossible to time the market.

Imagine this: you buy a stock and the price doubles over 30 years. Are you happy? If you convert that to an annual return, it is approx 3% per year. You would probably have done better on a GIC and eliminated all the risk. Real estate investors often fall into this trap and think they have come out better than they really have, because they completely ignore the time value of money.

Now, buy & hold assumes long term growth regardless of short term fluctuations. In other words, the price will eventually revert to the long term average growth trend. Although I agree with reversion to the mean, a better strategy than buy and hold to take advantage of this is to break your purchase into smaller parts over time.

Conditions:
1. The farther away from the expected long term average growth (target price), the better the investment. You only want to buy when the price is lower than your last purchase price.
2. Keep the # of shares purchased consistent i.e. 200 shares each purchase (pre-define this number before you begin and stick to it)
3. Keep the share price interval consistent i.e. every $0.25 drop (pre define this number before you begin and stick to it)
4. Sell once you reach your target price, dont get greedy and try to stretch your target price, stick to the pre-defined target. (This is the key to reducing risk in this strategy).

You will be stongly tempted to buy more than you should each time it goes down, and you may be tempted to wait longer than you should to sell once you reach a gain.

The risks are 1. that you don`t make enough money (either the stock price stagnates, rises before you buy enough shares, or you run out of funds before the price reaches the bottom) 2. your analysis is wrong, and the company decline becomes permanent.

Volatility will protect you from the first problem, and highly conservative analysis will protect you from the second. Your overall risk is reduced, and you rely on the market to create value opportunities for you. It is even better when the stock pays a dividend, because the risk of a stagnant stock price is offset by the steady income stream.

Once you have this strategy in place, trade the hell out of the stock. Don`t hold the stock through the rise and fall. If the stock runs away on you after you sold, move on to another. There are plenty of fish in the sea.

Current recommended stock I use for this strategy is Manulife (MFC).

Max
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Profit = sell

Post  Fred on Sat Oct 09, 2010 2:38 pm

I think that was extremely well said. It's worth reading that post twice.

My additional coments ...

One thing is for sure, that if you buy a stock and it goes up - if you sell, you will not lose money. Sounds obvious, but I firmly believe that should be a strategy everyone takes to help reduce risk. What you do may depend on what type of investment you have, your target price, some indicators you follow (RSI) and how long you planned to hold on to it.

My examples are two that I have had in my Tier 1 or stable account. I bought two stocks in Sept with the plan to hold for long term gains. Pembina Pipeline for the dividends and Ternium because I like steel and it was very low. The plan was to hold them for a while, but Pembina went up $2 per share, which is equal to 1.3 years of dividends... in one month! So I sold (10%). Ternium did even better. The point is that I sold when I was up, and I have secured my profits. They can only go down if I re-invest, and if I am as careful to time when I do that as I was when I did it the first time, then I will stay up.

Remember what Eric said... its easy to buy, but it is very difficult to sell. Set your targets and stick to them.

Fred
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