Sunday, May 24, 2009

The Buy & Hold Myth

From Gibbons Trading, another trend following trader:


The period of history the buy and hold advocates don’t want you to know about is 1929 to 1954. The highest close for the Dow was 381.17 on 9/3/1929 before the beginning of the great bear market, and it took 25 years to get back to “even” on a nominal basis (not counting inflation). The Dow closed above 381 for the first time on 11/23/1954 after the high in September 1929.

No one would have held stocks for 25 years and no one will hold stocks now- they are selling and will continue to sell en masse until everyone hates the stock market and no one even cares what it does from day to day. At this point, we will see true capitulation and the start of a new bull market.

Buy and hold? Stocks for the long term? It was irrational when it was first promoted and is still irrational. The reason it is irrational is because markets trend both up and down. The trend is the basis of all profit, so you cannot make a profit if you are opposite the trend. If you had bought the S&P 500 ten years ago, you would be down 32% not counting inflation- and you would be down over 50% with inflation. Oh yes, I know the academic argument that if you hold your losing trades long enough, history has shown you will make a profit. I can assure you that no investor has the discipline to stay with losing trades for the several 20-30 year bear market periods in market history to get back to even.

Buy and hold is a scam promoted by Wall Street for the gullible, and would you believe most people still accept this notion? The reason I make money in the markets is because the vast majority of investors are fools- and my VTM capitalizes on their perpetual foolishness (actually they are idiots because they cannot or will not acknowledge the cardinal importance of the trend).

I have a few clients who have been buying select stocks and/or refusing to go short for much of 2008 and so far in 2009. The result- they are decimated financially because they thought they were smarter than the market. If you buy and hold you have to make money eventually- right? They got conditioned like lab rats to buy stocks because of the propaganda they got from an industry that makes money by getting people to buy the stocks they and others are selling. The mutual fund industry is a high cost and underperforming scam perpetrated by the Wall Street elite. They don’t like trend traders like myself- we negate the buy and hold myth.

Investors have been in an uptrending market since 1974 and cannot adjust to a downtrend because of their lab-rat conditioning and intellectual inability to check their premises. This year’s historic decline is an expensive lesson for many and it stresses the importance of remaining flexible and not holding any opinions about markets. I have no opinions that I act on- I only act upon VTM buy and sell signals. If you do what the market is doing you make a profit- if not, you join the millions of market losers. And, rest assured, if you insist on buying stocks in a downtrend, I will be on the other side of your trade along with my hedge fund clients most of the time. I’ll take your money and have all of this year.

If you are one of the losers, take a long/hard look at yourself in the mirror. If you are not doing what the market is doing, you are letting your ego supersede reality which is the definition of self-delusion. Self-deluded investors lose a lot of money in markets. If you want to stop losing, you first need to start winning. While the VTM is not a sufficient condition to win, it is a necessary condition. I will continue to provide my clients with the best trend following method in the world and you can take that to the bank.

We make money in downtrends because we go short. My VTM trend following trading system simply goes with the flow which is the rational thing to do at all times. Obviously if the vast majority of so-called “investors” have losses this year, they are not trend followers. Trend followers such as myself have record profits. If you are in the market to make a profit, how can you logically trade without regard to the trend?

Observe the magnitude of the market losses this year shown by the ”smartest guys in the room” that made money in stocks by simply being fortunate enough to have caught the greatest bull market in history. Even Warren Buffett has lost his ass in this decline, with Berkshire down 31.7 in 2008. You see, most people (including Buffett) made money in stocks by luck- not skill, because we have been in a long term bull market since 1974. They established great long term track records because there was never a large enough trend to the downside to significantly impact their performance. Anyone that bought stocks had an edge simply because of the uptrend which was the basis of all profits made by simply buying stocks. Now the long term trend is down, and we can see clearly that the luck has run out for those that do not respect the power of the trend. The real lack of market acumen and trading skill is now exposed for all to see. The biggest winners in the past are now among the biggest losers.

Bill Miller’s Legg-Mason Value Fund was down 55% in 2008 because he is not a trend follower and only buys and holds stocks. He and others are “value investors” (whatever that means) which is based on the premise that stocks go low enough so they can be bought and sold later at higher prices. But this assumes that what goes down will not continue to go down. What if the S&P 500 drops 800 points as it just has, and the stocks that seemed to be great values keep going down? In my view, his long term track record was more luck than skill. Now there is no more luck and the lack of regard for the trend has greatly tarnished his investment record.

Are you aware that there is virtually no discussion of trends and what they are by anyone in the investment community? Now, why would that be since the trend is the basis of all profit? The reason that the word trend is anathema is because you will be out of the market or short about 50% of the time. Out of the market 50% of the time? That’s bad for business on Wall Street. Anything bad for the buy and hold business is not going to get much coverage. You also don’t need analysis and financial news, since trend following models are not based on fundamentals or news events. Eliminate those from the equation, and you have a lot of unemployed people. Again- bad for business.

Do you get the concept that is being established here? Forget the buy and hold myth promulgated by the thousands of shills for the Wall Street Gang- the trend is your friend.

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