Financial Guru: Buy-and-Hold a Thing of the Past

Apparently, this financial guru thought that buy and hold was just the thing when everything looked so good and prices were rising.
Now that the prices fell, at some point almost two times below what this guru was paying for his buys, he realized that buy and hold was "a thing of the past" and he should cash out from whatever he was holding and be in cash at least 50%.
Then this guru refers for support to Ben Graham, of all people, because Ben Graham "concluded near the end of his life that stocks were simply too risky". (Ben Graham died in 1976, so I would like to know when exactly he concluded that stocks were too risky, as he possibly was right for his time).
But the article gets better. It then cites another guru, who says that an investor should own "from 3 to 11" low cost index funds.
Reply to
Igor Chudov
Ben Stein was a speech writer for Nixon. How did he transform himself into a financial guru?
Reply to
PeterL

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"Should", like "always" and "never", is a word best left out of advice to those one doesn't know, just like one would leave those words out in arguments with one's spouse.
Elizabeth Richardson
Reply to
Elizabeth Richardson
Did Stein think his stock portfolio would only rise, through short and long terms? Buy-and-hold has always meant for the long term. Witnessing the 1970s, for one, an investor should bear in mind this may mean more than 10 years. Plus writing these things at an apparent market low is the sign of one who bends with the market wind. This is also not a characteristic of a true buy-and-holder.
I would like to see the context of his claim about Graham. Graham has always advocated bonds as a part of one's portfolio. For a defensive investor he specifically advocates a split between high grade bonds and stocks of around 50-50, never falling above 75% nor below 25% for either category. During a bull market, he wrote the portfolio should be re-balanced as needed, selling some stocks and buying more bonds. During a bear market, vice versa.
To me, Graham advocates betting on the economy as a whole via stocks and bonds. This means betting that demand for better products will continue; that society's health and well-being will mostly rise over time as a result of these products; that stocks generally over the long term must inevitably reflect inflation; and so on. These are the only rational reasons for owning stocks; any other reasoning denotes a gambling mentality, AFAIC.
Reply to
honda.lioness
There is a lot of financial gurus out there who do not realize that assets have a price and value. The value may be hard to calculate, but it is independent of price. The value is in future earnings.
The risk of owning these assets is determined by how much you pay in relation to that hard to calculate value. Which is to say, the risk is in paying too much of price in relation to value.
So if Ben Stein was a little more careful in stating what he stated, he would have said "Buy and hold did not make sense then, because I paid too much for assets".
My own reasoning is that when you buy stocks, you pay for earnings, so if you pay little enough, you will come out ahead.
I am finishing up reading the book _Stocks for the Long Run_ and find that it is not as bad as I thought. It does talk about future returns being inversely related to P/E.
Reply to
Igor Chudov
On valuing stocks--
If he said the above, then I would say he leans towards a timer mentality. A lot of market corrections are based in panic which cannot exactly be predicted. We could have had a nice soft landing with this bubble, and Stein's portfolio would have fared better. It is really not clear that Stein was irrational when he bought his stocks. If the fundamentals were sound, then /for the long run/ he should be fine.
No serious diagreement with anything else you wrote. I do suggest at least skimming Siegel's 2005 follow-up book. He amends slightly some of what he wrote in the SFLR book.
Reply to
honda.lioness
snipped-for-privacy@gmail.com writes:
Yeah. He now writes economic nonsense in a NYT column. Felix Salmon over at portfolio.com has a great series of posts ("Ben Strein Watch") eviscerating Stein's inanities.
-- Rich Carreiro snipped-for-privacy@rlcarr.com
Reply to
Rich Carreiro
What exactly do you call a "timer"?
For example, I did not buy much stocks (stock funds, that is) in my and my wife's pension plan, in the last several years, due to what I considered a not too attractive price.
Then when they fell by almost a factor of two, I bought them.
Does that make me a market timer, in your view? I respect your opinion, I just want to know what you think.
If this is market timing, what is the alternative? To buy stuff "regardless of price"?
In any case, I think that not wanting to pay too much for assets is virtuous and market stabilizing, and willingness to overpay is destabilizing and leads to Ben Stein's mentality.
I think that Stein is definitely irrational, either when he bought at the top, or when he sold at the bottom.
Is that a different title or a different edition?
Reply to
Igor Chudov
The article cited says Stein now recommends a 50% allocation to bonds. Generally speaking, this is what Ben Graham advocates. Is this inane? Is it possible you yourself have a sizable high grade bond allocation?
Blanket condemnations rarely have a place anywhere. People should either look up Stein's biography and constructively criticize specific statements or else stay off the computer keyboard.
Reply to
honda.lioness
Elle wrote Igor wrote
I think one characteristic of a timer is a tendency to think a stock purchase was a mistake just because it went down in value in the short run.
I believe elsewhere in this forum you have said you look at the soundness of the companies in general prior to making a purchase. If so, then no, I would not call you a timer. My impression is you are big on valuation, period. We do not see everything the same way but I think this is a big point of overlap.
I agree. I think where the dispute lies is in when a person overpaid. Just because the price declines in the short term, this does not mean a person overpaid, except in the sense that the person lost a short term casino style gamble. One should not hit one's self up side the head just because s/he did not get the five-year low or whatever price. Bet on diversity and the long run, and I think all will be fine.
The title is _The Future for Investors : Why the Tried and the True Triumph Over the Bold and the New_ (2005). It emphasizes valuation, so I think you might like it. I skimmed it a few years ago and it with SFLR and some other authors are on my recommended list. Now I want to go read it again and see how it stands up in the fa> ce of today's credit crisis.
Reply to
honda.lioness
Igor Chudov linked:
should have seven years of expenses in cash or near-cash to ride out events like this if you're retired or close to retirement... This turns out to be a simply brilliant suggestion.?
I'm retired is to have 7 years income in CA$H... The strategy is to avoid selling low as the way to **ensure** success. I came up with this plan. I have around 30 years of people shooting holes in it to refine it. The 7 years cash plan was more that the stock market can recover in 7 years."
The conventional wisdom to have a portion of one's portfolio in high grade bonds/CDs along with reflecting on jIM's post way back when is what is paying for my ski lift tickets today.
Reply to
honda.lioness
I would agree with that.
Yes. I am big on valuation and especially do not like paying too much for anything. I am not actually a great stockpicker, despite some business education, but at least I try to stay away from some obvious junk.
and low price
I bought this book a few days ago. I will hopefully receive it soon. I am 90% done with _Stocks for the Long Run_.
Reply to
Igor Chudov
On Jan 12, 12:08 pm, Igor Chudov:
How do you measure how well you have done picking stocks? If we are not talking about at least 10 years of data, then I would not judge. Excepting maybe something like a person's last five picks all went bankrupt.
Reply to
honda.lioness
One of my picks did go bankrupt. It was not a big amount, though.
Anyway, estimating return is not very easy. Especially considering that I have many accounts, funded at various times. But I will try to go through my Ameritrade statements to see how much money I put into my Ameritrade account vs. how much I have now. I also would need to report taxes paid or credited from losses and gains. This is very hard.
On one Vanguard Brokerage IRA account to which I did not add money since late 1999, I had a return of approximately 61% since that time. That is 61% total, over these years, not annual. Nothing was added to it over these years, so annualized return is not hard to calculate. I believe it comes to 4.9% per year. At the same time, the total return of S&P 500 was -3.2%.
On my Ameritrade IRA account, I invested $18,000 into it from 2001 until 2008 (not counting my 2009 contribution), and on 1/1/2009 I had $21,529. I added money throughout the years, so it is hard to compute actual return, but I stopped contributing in 2004 until late last year, so 13,000 out of 18,000 was invested in 2001-2004 and for 2008 it was 5,000 in last December.
If I was to report to you on 11/24/2008, prior to my late 2008 contribution, then I would tell you that my contributions were $13,000 and the value of the account was $16,109. So the return can be said roughly 3% per year on this account, but it is harder to calculate accurately.
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Reply to
Igor Chudov
Following this theme though - the perhaps greater risk is assuming that you have the ability to determine the times when there is a difference between today's price and the asset's intrinsic value. And more than that, assuming that you'll make the right choices at those times when presented with obviously cheap, and obviously expensive, markets.
All this talk of Nov 21st - who bought anything on that day? I did, and so did everyone else whose strategy, generally, involves long-term approaches like "rebalance asset classes when they get off their targets, even if it makes your stomach churn." To help with the latter, I did this while looking at a small cut-out on my desk, torn from a magazine umpteen years ago, showing the inverse historical correlation between today's P/E and future returns.
But that was rote buying, and I'm not going to claim any special insights, because I do rote buying at bad times too - after all that's what the strategy requires. My hunch was that it was an unusually large dip, but that wasn't the basis for buying.
OK so that's one type of purchaser, the other type were all the brilliant people who are good at determining when there is a large gap between value and price.
So...will anyone step out on a limb and say they did that? In retrospect, it may have been the cheapest market day of the last few decades. If you didn't call that one...well how do you have any hope of catching a "5% mispriced market" or some similarly small gap? Seriously - who would say, today, that they should try to determine value/price deviations, if they missed Nov 21st, which may go down as the Big Kahuna of value/price deviations (or not!!! - we'll only know in hindsight).
Another example - I created a spreadsheet of median-price housing data in 2003 for my clients, pairing it with Freddie Mac data on mortgage rates. When Case-Shiller came out I shifted to that. I did it then because it was pretty clearly a bubble at that time, though I had no idea of course it would keep going as far as it did. I showed that to some people who said "my god I'd never buy into that!" I showed it to others who said "well yeah, but as long as I can sell for a higher price what does it matter?" and bought into investment properties that are now deeply underwater. It was so clear it would happen based on rent vs own and income vs. housing cost comparisons. You can lead a horse to water...
So this is an important aspect of financial planning that doesn't get discussed enough. People make really bad decisions, saying on November 21 "I think we're at the cusp of a really big drop" (to paraphrase one post). Buying gold after a huge gold rally. Selling stocks after a huge drop. Buying big into international stocks after four years of 20%+ gains. Then you look at a simple, rote, buy and hold (with rebalancing) portfolio and hey, how about that, it avoids that risk.
-Tad
Reply to
Tad Borek
With a spreadsheet it's easy as pie. Enter all of your transactions (excluding reinvested distributions) as a single cash flow, and XIRR() will give you your internal rate of return.
You seem to be a value-conscious investor; don't brokerage accounts incur fees/commissions on top of regular fund expenses?
Reply to
Tortoise
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Apparently,
The "buy and hold" philosophy is difficult to put into practice, because in bad times it has a way of turning into "buy and hold, except, of course, for real bad times of trouble like this." And all times of trouble somehow seem to be worse than the last one. In order to be a true "buy and hold" investor you have to have a certain knack for setting aside even apparently logical arguments and stay the course no matter how bad it looks. That is not easy. For small investors it is probably harder than giving up smoking or cutting down on cholesterol.
Reply to
Don
Hm, sounds like something to try.
They only incur fees if you trade. And then, only to the extent of how much you trade. I did nothing whatsoever in that account since 1999. The shares that I owned in 1999 is what remained there and I did not reallocate a single penny. I intentionally allocated this account in 1999 with the specific intent to not touch it at all, ever, for certain personal reasons.
Reply to
Igor Chudov

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