Buy-and-Hold Debate Gets Louder as Market Volatility Rises

Hussman, Faber favor market timing; Bogle defends it against Cuban's attack

Mark Cuban, owner of the Dallas Mavericks, disparaged buy and hold. (Photo: AP) Mark Cuban, owner of the Dallas Mavericks, disparaged buy and hold. (Photo: AP)

The rising level of market volatility as 2011 comes to a close seems to be bringing with it a return of doubts about “buy and hold” investing that became a fixture of investment debate in the market crash of 2008.

In a letter to clients released Monday, Hussman Funds manager John Hussman opined that what he described as a “near 100%” chance of  recession combined with rich market valuations suggested investors would be prudent to sell risky assets now to beat the rush. Investors committed to a buy-and-hold should do so only after making “a conscious and deliberate” choice, he warned.

Billionaire Mark Cuban, owner of the NBA's Dallas Mavericks, put it less delicately in an interview with The Wall Street Journal in September, when he said “buy and hold is a crock of s***.” Cuban was rebuked by no less a personage than John Bogle, known as the father of index funds, who told The Journal that investors, collectively, are inherently buy and hold creatures: “For instance, if I sell my shares of Microsoft (although I’ve never owned it) and you buy them, the world is unchanged.”

But even Bogle delimited the principle of buy and hold, explicitly rejecting the stocks-only approach with which the strategy is best known: “But what do you mean by buy and hold? Do you mean buy and hold stocks? I would say don’t do that. I would say buy and hold stocks but buy and hold some bonds as well. Call it having a bit of dry powder to protect you from your own emotions.”

Other investment professionals are chipping away at buy-and-hold investing from other perspectives. Kristof Bulkai, manager of the Thames River Global Emerging Markets Absolute Return Fund, writes in Monday’s Daily Telegraph that buy and hold is a losing strategy for commodities investors:

“Commodities do not produce income, they cost money to store, and when the price is high enough, invite substitutes to take their place. For these reasons, ‘buy and hold investors’ in most commodities do not make money over the long run, and the inflation-adjusted return of most commodities is in fact negative over the past century.”

AdvisorOne blogger Bob Clark makes a similar point in the current issue of Investment Advisor, calling commodities “volatile, market-trend investments that aren’t particularly well-suited to a buy-and-hold strategy.”

Notwithstanding the notion of excluding commodities or adding bonds within buy-and-hold portfolios, the key argument against buy-and-hold investing in recent years has been the observation that the 2000s were a “lost decade” for stocks, where investors literally ended up with less than they started at decade's end. Indeed, an analysis by CXO Advisory showed that flipping a coin to make investment selections beat the buy-and-hold strategy by 29% on a cumulative return basis over the decade of the 2000s.

An article in Forbes published last week, part of a series vigorously defending the buy-and-hold principle, notes how markets that were down on average by 5.5% after a volatile and gloomy news driven September ended spectacularly up by the end of October, a month that is historically volatile and negative. Writes Forbes’ contributor Ellen Dorle:

“As a small example of why you can’t time the market, think about how you would feel if you took the word of the prognosticators that your loss in September was certain to snowball because October is more often than not, a down month.”

Yet, a recent study, by Mebane Faber of Cambria Investment Management, strenuously objects to the idea that timing the market risks missing the proverbial 10 best days, when owners of stocks earn their reward for staying invested. Rather, Faber’s research leads him to recommend that “investors attempt to avoid declining markets where most of the volatility lies.”

He concludes that “market timing and risk management is indeed possible, and beneficial to the investor." To be sure, the debate over just how active an investor should be in monitoring and trading markets versus a principled and passive buy-and-hold approach will carry on indefinitely. But today’s whipsawing markets ensures that many alert investors today just aren’t buying it, while others are holding firmly to their principles."

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