Sep 7, 2008

The Perils of Long Term Buy and Hold

Many readers here can say they lived and even traded during the greatest bull market in the history of the stock market. Around every corner held opportunity. Every pullback was another great point to add to positions. Are we in such a pullback now or are we destined to muddle through sideways or declining markets? A quick look at history prepares us for an answer – but luckily we’re trading with the same tools the greatest generation used.

Survival is a study of how to adapt to the onslaught of change. Is change coming?


Here is a stock chart of the Dow from 1960 to the present. It looks pretty amazing; in fact, the growth is exponential. But lets get mortal for a minute. What is long term? Is it 5, 10, 15 years? Let’s say its 1960 and life was not always easy for you and you really start getting your head straight with your finances at the age of 40. You feel optimistic because a new decade is approaching, its the 1960s. You have a family that you are looking to provide for and see the stock market as an opportunity to take your finances to the next level.

Flash forward, you did everything right. You put away money every month, and bought blue chip names to keep things safe. The problem is that now in 1975, 15 years later, you are actually worse off than when you started in 1960.

Not only has the market lost ground during those 15 years, adjusted for inflation, but you really took a big hit. Even worse your peak earning years are behind you. How could this have happened? Well it did, and does, and will continue to happen time and time again. The Japanese stock market has still not recovered from the excesses of the 80’s and it is twenty years later.

Too Long Can Be Wrong

You need to be aware of the simple fact that just going blind and buying may not produce any results. The industry is geared to have you think otherwise but this little time-traveling journey we took proves the fact that long can be wrong. So what is the answer? We believe the answer is to open your eyes and use tools that were not available a long time ago to take advantage of the whatever the market will bring – up or down. The tools I am referring to are quantitative in nature.

The difference between today and decades ago is the fact that it is easier to get one’s hands on information that was not readily available. Today you can dip the preverbial toe in the investment water without actually getting wet. Even better is the ability to ask and answer questions that previously were impossible to fathom. Questions like, “What win % rate and ratio of winning trades to losing trades result if I use this trading strategy for only an hour from 11:00am to Noon? What results are generated if I hold a position for 15 minutes vs the whole day?

Tools for Every Job, But Which One Saves the Most Time?

Our back testing tool called The OddsMaker allows you to see what happens to many trades so that you can get a gauge as to which way you ought to be trading. In other words are you going to be landing in that soft pile of money or on hard jagged rocks. Look before you leap.