In my experience, a great many investors have misinterpreted the “buy and hold” strategy. They have overly simplified the meaning to be: just buy stocks, any, hold on for the long-term and reap the rewards. I so wish it was that easy.
However, the essential requirement to regularly evaluate the intrinsic value of each position held makes the task of properly executing a “buy and hold” investment strategy that much more difficult.
Why is intrinsic value so critical to successful investing:
A pilot would never attempt to land an airplane without a point of reference; an aerial acrobat would never attempt a difficult manoeuvre without a focal point to ensure a safe landing. Likewise an investor can ill afford to make a bet on a stock without an idea of what the underlying business is worth. The intrinsic value is the investor’s key point of reference in deciding whether to buy a stock. Your task as an investor is to buy undervalued stocks and sell those that are overvalued. Once a position has been established, the investor should hold the stock until the market price approaches the intrinsic value, or security specific variables change in such a manner that reduces the business’s intrinsic value to the point where it is no longer a bargain. If you are skilled at determining the intrinsic value of a business, then active management makes a lot of sense.
Be agile like a bird:
Some days the wind blows hard, yet I have never seen a bird miss its attempt to land on a branch. Somehow these agile creatures are able to adjust to the changing conditions that may cause a branch to sway. In that same fashion, investors must understand that a once financially attractive target (FAT) may lose its luster. An individual company’s fortune may change, or as we have seen, the macro-economic environment may mutate as the result of larger tectonic like forces that have profoundly reshaped our modern day investment landscape. Because companies don’t operate in vacuums, it is important to realize these changes, be flexible, and adjust. So determining what to buy is as important as choosing what to hold, and what to sell. Hence, in my mind, “buy and hold” is a very active investment process because it is based on a continuous assessment of the value of all opportunities in your investment universe. Moreover, there is no reason to limit this process to a single asset class. The ability for investment managers to think across asset classes will be absolutely critical in the years to come.
In sum, although I strongly believe in taking a long-term view with respect to investment decisions, I have also observed that many investors have misinterpreted the instruction manual on what it means to invest for the long-term. They may have glossed over the fine print, and have therefore failed to garner the full benefits that accrue to those who have mastered the “buy and hold” philosophy. “Buy and hold” does not mean forever and under all circumstances.
Garnet O. Powell, MBA, CFA
I am honoured to have been able to share with you my thinking on the investment process and would be delighted to hear your thoughts.