Wednesday, June 10, 2009
Retail Investors' Mistakes #2 - Buy & Hold Mentality
It used to be that you buy stocks to hold forever. People will cite instances where they bought Genting or IOI ten years ago and made huge returns. Yes, that is a possible strategy. If you are going to adopt the buy and hold strategy, you should also know that there are only certain type of stocks that you can buy and hold. They must have a bright long term outlook. They must be well managed with a good management track record. They must be relatively transparent and treats minority shareholders relatively well.
But look at your portfolio, you certainly cannot buy and hold when you have MK Land, KUB, Perisai, etc... in your portfolio. This is not to say these stocks are bad, these stocks do not yet qualify to be solid buy and hold stocks.
Buy and hold stocks must be able to ride out the volatility and will be able to tap onto a global or at least regional market. Hence you don't buy and hold stocks that mainly has the local market only as their client base. The other considerations include looking at their return on assets and return on equity over a 5 year period at least. These must be good solid figures, at least 5% or higher. Then look at net margins over 5 years, they must be around the 10% or higher region at least.
If you buy the second or third liners, you have to actively manage your portfolio. There will be times to be 100% invested, there will be times you want to be 50% in cash or totally in cash. You cannot and should not be always 100% invested all the time.
p/s photo: Fiona Sit Hoi Kei