When a long-term punt is long-term stupidity

I GET a lot of stupid questions in my line of work. There are no stupid questions, of course, just good questions you are too scared to ask because you think they might make you look stupid. Well, let me put your mind at rest. You would be amazed what people in the financial industry don't know. We don't know a lot of stuff. Because we don't ask enough stupid questions like: "What's going to happen to my CDO if that guy in Florida doesn't pay his mortgage?" Like "How is it going to end if the CBA ...

By InvestSMART · 11 Apr 2009

By InvestSMART ·
11 Apr 2009

I got this one this week. A stupid question: Is "buy-and-hold" dead? Good stupid question. We have been punished by "long-term" investment, and you have to ask why and whether we can ever possibly trust in it again. It is only when a system comes under pressure that the weaknesses appear. The bear market has opened up a can of weaknesses in buying and holding, because there are a lot.

Ultimately, buying and holding is unrealistic. It has failed us in the short term because it breeds laziness, inaction and denial. The idea that you can make a decision on today's information and that information and judgment will persist for the next 20 years is about as arrogant as you can get.

The lessons of the past 16 months have been many, but perhaps the most obvious is that there is, unfortunately, very little certainty and a lot of guesswork in investing. We may set out with the best of intentions to make long-term investments but we cannot for an instant think that some grand declaration that it is a "long-term" investment excuses us from post-purchase responsibility. We are going to get half our stock picks wrong, every time, because guessing a 20-year investment performance is not easy. The trick is not in choosing the flowers, but in pulling the weeds. That is the job. Cutting your losses while your profits run.

It is the damage done by the losses that buy-and-hold merchants turn a blind eye to, which is why it doesn't work. Buy-and-hold's weaknesses were just hidden by a bull market. Without the bulls, even Warren Buffett has been slaughtered.

To beat the odds, all you need to do is check in once a week, month or year, and act to cull stocks that are going wrong. The market talks but the buy-and-hold merchants don't hear, let alone listen - or act.

Long-term investment is fantastic, in theory - but only in theory, or in hindsight, using examples of stocks that went up in the long term.

The theory fails to mention the impact of long-term mistakes on long-term investment. ABC Learning and Babcock & Brown were long-term investments once. The key to success is managing those, and doing that is not rocket science.

All you have to do is admit you are going to get some wrong and that to ensure the long-term performance of your good stocks, you need to do something about the bad stocks. Anything less is ignorance, denial and arrogance.

It's not buy-and-hold, it's buy-and-watch.

Here are a few more stupid questions and a few stupid answers:

"But I'm a long-term investor, not a trader, so what do I do?"

- Stop deluding yourself.

"How do I survive the bear market?"

- Sorry, you're too late.

"What are the best stocks to have in a bear market?"

- Cash.

"Have we hit bottom?"

- No one knows. Anyone who declares they know is guilty of reckless deception.

"When will we know that we have hit bottom?"

- Five years after the fact.