Something that I repeat ad nauseam in my workshops is that marketing geniuses don’t work at Coca Cola, they work in the financial industry. They fill the unsuspecting investor with stories in order to make the most of them.
The “buy and hold” is one of these stories. Financial advisors and investment funds tell it to their clients with the aim that they deliver their money in the long term and they can collect fees of administration every year.
But as a strategy it doesn’t work. On the contrary, it can be lousy.
The secret is this: much more important than defining what to buy is when to buy. And we could even argue that it is even more important to know when do not to buy.
Buying on a market roof can destroy capital in unimaginable ways, and recovering can take decades. Even the great geniuses of the Value Investing, like Warren Buffett or Peter Lynch, they have stated this countless times.
However, financial advisors are always going to recommend their clients to buy and hold because … “Even if prices fall, in the long run they will end up rising again.”
To substantiate their point they argue with fanciful hypotheses of the style “If you had bought Microsoft in 1986 and had kept it until today, you would have multiplied your capital by 2500”.
I want you to see below some examples of stocks of super successful companies and how they would have fared if they bought at the wrong time.
Microsoft
Few companies have been as successful in history as Microsoft. The rise in his shares over the years was staggering. But what if we bought at the wrong time?
If we bought Microsoft on the roof of 1999 we would have found ourselves 10 years later (yes, you read that right) 75% down. And it would have taken 17 years to recover the capital in nominal terms (without taking inflation into account!). And be careful: this is a “successful” case.
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Coke
This is another super successful company and considered one of the lowest risk on the stock market.
If we bought their shares in June 1998 we would have found ourselves 10 years later with a loss of 57%. To recover the nominal capital we had to wait 16 years.
And as if that were not enough, in July 2020, 22 years later, we had exactly the same amount invested again:
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General Electric
One of the oldest companies in the US and an emblem. Until 2018 it was part of the Dow Jones index.
If they bought their shares at the ceiling of 2000 they would have fallen 90.5% after 9 years, and today, more than 20 years later they would be with a loss of 78%.
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Here we were talking about the “creme de la creme”; from some of the best companies in history. Imagine how they would have fared with lower quality stocks, many of which no longer exist.
But also, what I tell you is analyzing the most successful stock market in history that never stopped rising: the US. If we analyze the same in other markets the situation is much worse.
Think about the following: what would have happened if you did “buy and hold” with other markets such as Argentina, Brazil, Russia or even Japan? I answer them: they would have been massacred.
Let’s take a quick look at some more cases.
Galicia Group
If they bought on the roof of 2001 they would quickly have been -99% in 2002. And today, 20 years later, they would be -66%. If they bought Galicia on the roof of 2018 today they would be -90%. How’s it going?
Petrobras
If they bought at the peak of 2008, almost 8 years later they would have been down 96.5%. And today, 13 years later, they would still be -89%.
Nikkei Index (Japan)
Buying the Japanese stock market at the peak of 1989 after 19 years would have been -82% and would continue to this day without recovering the initial capital.
Finally, even in the few cases where the “buy and hold” it would have worked as in Apple, it has no justification as an investment strategy. It is important to cut losses so that you are not left out of the game.
Even if they had been visionaries in buying Apple in March 1991, they would only have recovered what they invested in 2004, having had to endure two corrections greater than 80% in the middle, and then other also strong corrections on their way to current values.
In short, and speaking a bit in technical terms, the “buy and hold” it doesn’t give them a probabilistic advantage, which is what it takes to win in the stock market in the long run.
To win it is essential to cut losses quickly and let the profits run. As simple as it sounds, few manage to do it in practice.
Finally, I want to invite you to download a 100% free report with 10 shares of companies that may rise strongly in 2021. You can download it at this link: Financial letter – 10 actions by 2021.
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