Monday, May 31, 2010

Buy & Hold?

Hi Dali,

Sorry to trouble you. One of my readers ask me about these questions.
I don't spend much time on stock analysis, but you do. Here is what he wrote to me:

Hi K C,

Thank you very much for your interesting and informative write-ups. I really enjoy reading them.

Is buy and hold (say 5 to 10 years) workable in Malaysian stocks?

Is it possible to sieve out 10 stocks among the thousands listed in Bursa Malaysia that can
1. still survive and prosper in the next 10 years
2. gain 15% a year compounded
3. need the least supervision (say half-yearly review)?

You are the best person to give him your insights.
If possible, you can reply this email or just post the answer on your blog and I will link to it in my newsletter and blog post.

Hope to hear from you soon.

Thank you.

regards, KCLau

My View: Buy and hold does not work in Malaysian market, and thanks to the globalisation effect, buy and hold does not work for global equity markets as well. Markets are now interconnected. If a fund had some big trouble with their Greek stocks, it may create a huge withdrawal of funds from their portfolio. In order to prepare for that, the funds may be forced to sell down other "good holdings". The example is exacerbated if these funds were leveraged. Thus, it may not mean much even if you are holding BAT or IOI Corp if Portugal starts to spiral downwards.

Can you really pick a stock in Malaysia that will do well over the next 5 years? Well, you can o0nly hope, you can't be absolutely sure. But there are guidelines in selecting "safe" or rather safer stocks. One major problem in picking a seemingly good stock is the failure to recognise whether a company "benefits" from certain government policies - that is not "stable" revenue without needing elaboration.

In picking a solid long term stock, it must have size, it must have critical mass, if its size is past critical mass that will equate to higher barriers to entry for any competition. Size will result in cost efficiencies and better bargaining power.

The second factor is to look at how each industry is going to play itself out. Do you think there will be more or less banks in the country? Yes, the country will be opening up more for competition, but just look at the experience of any country that has opened up, its the surviving local banks that will continue to prosper even more.

Another good example is plantation land, will it ever get cheaper? Even if you add on more environmental and green regulations onto the planters, they will still be able to pass on the cost. The way the global warming effect is playing out, weather patterns are more severe and harder to predict and more extreme.

Even when you do a lot more homework, you seriously cannot be doing a buy and hold strategy for 5 to 10 years. You may have been able to do it back in the 60s, 70s or even 80s... but the effects of globalisation and indirectly the prevalence of derivatives have created too much uncertainty. Stocks are just assets that is based on the liquidity in the system. Nowadays, liquidity can be totally withdrawn for a myriad of reasons unrelated to the underlying fundamentals. You cannot say that it does not matter if a stock is $10 today and will be $30 in 5 years, if it fell to $2 sometime between these two dates, does it matter? You can be Buffett in the 60s-80s but not today.


JP said...

Very interesting topic. I think the strategy is not suitable for retail investors. (just look at how the minority shareholders are treated in Malaysia) But for a big holding company with huge financial muscles, it could be viable as they could gain the controlling interest of a company.

Talking about Mr. Buffett, we have 10000000000000 investors trying to copy and implement his strategy all over the world, but the fact is, for the past 50 years, there is only one guy, Mr Edward Lampert who could be regarded as a successful buy and hold style investor. However, he was basically "given" millions when he first started his hedge fund.

random said...

people confuse buy and hold with buy and forget. I think most people are into it because they are lazy and apathetic and the buy and forget method appeals to them as they do not have to do any work after buying.

most wannabes get the stock selection wrong and then the entry wrong, then quote buffet over and over again as they watch their stocks get hammered.

kl said...

Buy & then hold a Malaysian stock for 5 years is akin to vote & then trust a Malaysian MP to do his best for you during his 5 year term.

It is recommended never to leave your money in the care of a businessman, or your fate in the hands of a politician, without constant supervision and adequate check & balance. Both types are distrusted for good reasons. Both need to be kept honest for they have major problems doing so themselves.

random said...

it's not that buying and holding is without its merit, but it requires more work than say day trading, contrary to popular belief

JP said...

That is why we need the controlling power of a company in order to execute the buy and hold strategy at its best. Fundamentally sound Malaysian companies which will do better in the next 5 years or 10 years do exist but they are just very rare. We never know what will happen in the country for the next 10 years.

LuZeeker said...

I think it on depends what "Buy and Hold" means. If Buy and Hold means Buy and Sleep for 5 years, then yes we'll have a problem.

One needs to keep monitor his/her stock that had been purchased but on the business not the stock prices. We’ll never know what’s gonna happen in the future. The management might change or do something funny, the economics nature of the business might change and etc. For me Buy and Hold is different than Buy and Sleep. For me it means Buy and Hold it until the reasons to hold it no longer appeal or when one have a better investment. If one sells a stock after a certain gain and purchase another, it makes no different than Buy and Hold just that you are now holding a different stock. That is why a periodic adjustment on our portfolio is so important.

And the reason why people talking about long-term, 5 years or 10 years is because they try to be as certain as possible that they are able to achieve capital growth in a long-run. In other words, taking calculated risk. I believe these people won’t be naïve enough to hold onto their stocks if thing doesn’t go well. They should adjust it from time to time. Do KLCI stocks have those qualities? try take a look at Uncle Tan Teng Boo’s iCapital.

ksq said...

to be fair, not everyone has the knowledge or resources to monitor the market on a regular basis. i guess the 'hold' investors are mainly the retired or near retirement group, not wanting to loose everything to the market but better than the meagre 2% FD.

i guess some stocks do fall under such category such as public bank and berjaya toto. you get your dividend and hopefully hedged against the inflation rate.

i dunno, dali or others may try to group these stocks for eager uncles and aunties. tx.

Super Saiyan 3 said...

I think Buy and Hold will still work, but the challenge will be much tougher (i guess that's what you mean, in some way).

It's like guessing who will be the next richest man.

Kam said...

AXIATA -- bought since Feb 2009, i think still can hold for one more year.

HEAVA-WA -- take a calculated risk, lifespan still got 9 more years, fundamental getting better.


FattyBomBom said...

Buy & Hold works only if you choose the Buy & Hold company, which usually gives high dividend.

PPB, PBB, Maybank, Tanjong, REITS and so on.

Why Capital Gains Tax Should Not Be Implemented

I have to reiterate why a Capital Gains Tax is a very bad idea for Malaysia. Unique traits of Malaysia: a) Very open economy b) Ringg...