Tuesday, August 07, 2012

The Death Of Buy & Hold Strategy

We know of the stories, heck we may even know the grand uncles and grand aunties who bought and kept Public Bank, Genting, BAT, IOI Corp ... for 20 years and now has a wonderful sum to retire on. Can we still do this kind of investing now with a 10-20 year view? The answer is probably not.

What has changed? Globalisation. Globalisation of markets and the end of localised long term sustained performance. Look at the four cited companies above, it was largely a localised play, which is to mean that it can really carry on its normal business with minimal shocks outside of the country - they couldn't care less. However, if you examine their business models now, each of them has a significant regional or overseas exposure, probably with the exception of BAT (so, BAT can still buy and hold I guess).


Buy-and-hold doesn't work anymore as the game has changed. The volatility is too significant. Almost any asset can suddenly become much more risky. Buying into just a few good stocks and holding it for 10 years is no longer going to deliver the same kind of expected return that we saw over the course of the last seven decades, simply because of the nature of financial markets and how complex it's gotten.


Think of two or three stocks you would want to buy and hold for 10 years. Now assess how badly would they be susceptible to the "new risks". Examples of market risk factor exposures include the following:


liquidity risk - liquidity suddenly drying up making it inefficient to get out at a fair market price
sovereign risk - the inherent credit rating of the country, plus the way they manages their capital flows, not to mention their deficit funding per GDP, reliance on short and long term funding, leakages and other inefficient market practices, dramatic change in government and economic policies, likelihood of inciting dissension with other countries


interest rate risk - the ringgit is still lumped as part of Asia's emerging markets currency, like it or not, if one of our neighbours' currency gets whacked, we could suffer collateral damage


credit risk - as above, in particular when the country cannot borrow funds internationally unless we pay exorbitant rates


equity market risk - this is inherent but has multiplied owing to the globalisation of markets and the inter-connectedness


stock-specific risk - no matter how good your company may look now, there are inherent Black Swans within that specific stock, what if Genting Higland's local casino license is revoked, what if there is now a new product can substitute for palm oil at just 30% of the cost and presents more benefits, what if a very very big listed group in Malaysia suddenly fails and all local banks have to write down massively

You can see that the stock market game has changed. The most obvious is volatility. Imagine a big fund with $20bn in US and Europe equities, $10bn in Asia and another $10bn in South America. If a big crisis comes a calling like the subprime, the fund may suddenly face massive withdrawals, as the subprime mess is in the US, prices of stocks there may have suddenly plunged 30%. To cater for the withdrawals, they will sell down their Asia and South American portfolio even though they are doing well and have little impact from the crisis. Thats inter-connectedness.


Already, you don't even need funds to actually sell, investors everywhere are already anticipating and expecting such events, so much so that when any big crisis occurs somewhere, they will sell their local stocks before waiting to hear what the business experts and funds are going to do. Its a self fulfilling thing that rocks the markets.


You can buy and hold but must be wary and you need to be in cash in times of big uncertainty. You can always go back in at lower prices. 

7 comments:

steve said...

Your last sentence "You can always go back in at lower prices" is easier to talk then to do. Imagine Padini, once sold, can only watch it goes higher and higher. This is why "buy and hold" is still a good strategy on certain stocks. Not saying short term trading is no good. Just my view.

missy's a lady said...

Ill agree with Steve. I bought Padini at 0.83 cents....its has gone to a ripe price of RM 2.21. I think on certain stocks we may apply buy and hold. We must also know when to dispose. This is just my opinion.

CK said...

Dali,

Based on this argument;

'What has changed? Globalisation. Globalisation of markets and the end of localised long term sustained performance. Look at the four cited companies above, it was largely a localised play, which is to mean that it can really carry on its normal business with minimal shocks outside of the country - they couldn't care less. However, if you examine their business models now, each of them has a significant regional or overseas exposure, probably with the exception of BAT (so, BAT can still buy and hold I guess).'

So, how about Digi?

It almost fit to the dot as BAT's local market exposure, zilch oversea investment & tightly controlled by Telenor.

At least V Tan voted it a better buy than Facefook!

Hal said...

The volatility and uncertainties are sometimes so great that one is reluctant to hold a stock overnight. So, what one does is to play the intraday movement.

In other words, we are forced to become daytraders or Bladerunners which sounds more colourful (as in the movie of that name by Ridley Scott).

As an example, just last week Knight Capital got slammed seemingly out of the blue and lost about $440 million due to a software glitch. Over the next two days their stock lost more than fifty percent of its value. I can imagine the pain Knight's investors must experience when they were slow in getting out.

Nowadays I hold this thought foremost in my mind: When skating on thin ice safety lies in speed.

Brad M said...

Buy and hold still works, but not buy and sleep.More diversification and closer monitoring needed to reduce Black-Swan risks. If you were holding a position in the Knight company which was the biggest market maker in the NYSE, you would think that profitability from the bid-ask spread is a no-brainer;how can you anticipate that a "software error" can create a loss of USD 440 mil in 3000+ minutes of trading,wipe off more than 70% of the market cap and requiring financial injection into the company by "white knights" to stave off bankruptcy? Trading will become increasingly difficult in the current climate of fear and short-termism where cycles become shorter and mood-swings more violent.

Peter Lim said...

It's Not that buy and hold doesn't work.

It's How you buy that is the problem.

Lutfi said...

good arguments, but with all the volatility right now, do you think it's wise to trade?