Why are these buy and hold investors smoking me?
A reader asks: why are these buy and hold investors smoking me all of sudden?
Archer replies: The 14th century English philosopher and theologian, William of Ockham, put it thusly, Entia non sunt multiplicanda praeter necessitatem, which translates as "Entities must not be multiplied beyond necessity" (per Wikipedia). This has come down to us as Occam’s Razor, which posits that when faced with multiple options in problem solving it is generally best to go with the simplest one.
A recent Bloomberg story was entitled, “Stock Faithful Ride $7 Trillion Rally as Market Timing Backfires.” The strategy employed by these true believers? Buy and hold. Boring? No question. Very boring. But it seems to be working. As of the end of 2023 that Bloomberg story, published on December 8, seemed quaintly out of date. “Market timers tempted to call the top as (S&P) index hovers near 4600,” said a subhead. Less than a week later the S&P stood at 4718. Whoops! Of course true buy and hold investors won’t care. They’ll hang on when things go down, too. (And they have been going down of late.)
Bloomberg reports: “… buying and holding equities has trounced 22 technical strategies used by traders to navigate their ups and downs.” Those strategies include moving averages, relative strength, MACD (moving average convergence/divergence), Bollinger Bands (a measure of standard deviation), fear & greed, and the always popular, stochastics (a measure of overbought and oversold).
Tracking all that sounds like a lot of work. But it’s probably fun, too. And, of course, the downside of having all your money in an S&P 500 fund is that you’ll never be better than average. It seems almost un-American. As an aside, there’s a growing concern – expressed by everyone from Bloomberg Columnist Matt Levine to Elon Musk – that passive investing funds are getting too big leaving no one to trade to create the “market” with potential consequences that are as yet not really understood.
I don’t know about that. It seems like there will always be someone looking for a workaround.
In his 700 B.C. poem, Works & Days, Hesiod lashes out at his no-good brother for trying to steal his farm. He counsels instead that the good life is to be achieved through hard work. Seems reasonable. In the case of the stock market, the hard work of generating profits is also a matter of works & days, with most returns (and losses) generally coming in a relatively short period. By one estimate, if you miss the ten best days in a given year you will see portfolio returns drop by half. On the flip side, if you were to somehow go to cash just prior to the ten worst days your returns would be two and half times those of a buy and hold strategy (according to an analysis from Advisor Perspectives).
Last year, the two biggest moves came early. The S&P 500 jumped 2.28% on January 6, its biggest day of the year. It fell 2% on Feb. 21, its worst single-day performance, according to Morningstar. A handful of stocks – the so-called Magnificent Seven – contributed nearly half the gain in the S&P (also, Morningstar). Owning those seven stocks alone would have generated a return of about 75%. Owning them as part of the S&P 500 returned a more modest, but still solid, 24% or so.
The math on all this is easy; it’s figuring out the days to be in or out of the market (or the stocks to own) that’s hard. The reality is that if any of the many alleged market-beating strategies were simple to execute you would see lots of people beating the averages, but you don’t. In 2023, active managers again underperformed, continuing a trend that has persisted for more than a decade, as reported by S&P Dow Jones Indices.
An old high school friend once observed that, “It’s my half of the class that keeps the other half on top.” Most people don’t want to be below average, or even average, and much time and mental energy is taken to avoid it. Entities are multiplied. But when it comes to markets, sometimes average is not so bad.
Woof.
SHAMELESS SELF-PROMOTION: I recently published an op-ed on how ETFs and technology can help address wealth inequality. You can find it here.
My new book, Radical Problems, Simple Solutions: How Markets can Help Fix the Retirement Crisis and Solve Wealth Inequality is available for purchase at Flyleaf Books.