Is buy-and-hold investing dead?
October 30th, 2012
Over the years, many so-called “blue chip” stocks have lost their positions as market leaders. The strategy of simply investing in today’s best companies and holding them indefinitely is no longer a prudent approach.
To be successful in the current market environment, investors must be vigilant, informed and ready to sell. For many, hiring a qualified portfolio manager may be their best investment yet.
It is easy to find companies to buy, but much harder to know when to sell. As legendary investor Warren Buffett has said, rule No. 1 in investing is “don’t lose money.” By protecting the downside, a portfolio can recover from losses and return to profitability much sooner than an otherwise more risky portfolio.
To illustrate, by March 2009, the S&P 500 was down a staggering 58 per cent from its 2007 highs. At Galliant, our long/short strategy enabled us to limit the downside to about one-third of the market’s decline. Only 10 months later, our fund was able to recover its losses. In contrast, more than three years have passed and the S&P 500 has still been unable to recoup its losses.
Passive buy-and-hold strategies do not account for secular changes in business, such as technological advancements. One example of a stock that many investors viewed as defensive was Yellow Media (TSX: YLO). When its predecessor, Yellow Pages Group, went public via an income trust at $10, many investors believed that its near-monopoly in the directories and Yellow Pages business made it a safe place to put their money. The income trust also offered an 8.3-per-cent dividend yield, further enticing investors. However, as Internet usage became more prevalent and consumers could find businesses online, the Yellow Pages became virtually obsolete.
As a result, Yellow’s once steady income stream slowed and the company eventually stopped paying its dividend. Today, Yellow trades at $0.065 and has had to reorganize its business in order to survive. Attentive portfolio managers should have seen this downward trend coming and exited the position long ago.
Another example is Citi-group (NYSE: C), which was considered by many to be a core investment holding. During the recent mortgage crisis, Citigroup cut its dividend almost entirely and its shares lost more than 90 per cent of their value. The company has since executed a 1-for-10 reverse stock-split, meaning that its recent closing price of $36.60 is equivalent to $3.66 pre-split. Now, in order for it to return to its previous highs, the stock must reach $509, an increase of nearly 1,300 per cent.
Even worse, stockholders in General Motors would have lost all of their money had they held shares when it sought bankruptcy protection in 2009. Eastman Kodak and Nortel Networks are further examples of companies that have gone from blue chips to busts. If you were to compare the top 10 Nasdaq-listed companies from a decade ago to those today, you would find that few of the same names remain. Hewlett Packard and Dell, for instance, have fallen dramatically as these companies have struggled to innovate at the same pace as their competitors. The future is unclear whether they will rebound or fall by the wayside.
These cautionary tales prove how important it is to have professional help when building a portfolio. Experienced portfolio managers who analyze companies and do the necessary homework to make qualified decisions on their merits are a rare commodity. Investors should seek disciplined portfolio managers who constantly challenge their investment theses and are ready to make changes as necessary.
The market environment is constantly changing and an investment idea today is only as good as its current fundamentals. Investors need to be aware of the pitfalls associated with a pure buy-and-hold approach.
As the market does not go up in a straight line, having a portfolio manager who knows what to buy and when to sell can help you grow your assets, but more importantly, protect your capital.
Ian Shaffer is a portfolio manager and the president & CEO of Galliant Capital Management, which manages investment funds and individual client accounts. Ian can be seen regularly on BNN’s Market Sense. He can be reached by phone at 514-788-5544 or by email at email@example.com.