Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Tuesday, March 16, 2010

A Case for Buy and Hold

Time and time again people argue over the effectiveness of a buy and hold strategy. There are different approaches to buying and holding just as there are many alternative strategies. Many believe they can effectively time the market, specific sectors or asset classes. Technical analysis utilizes charting to trigger buying and selling. Everyone is looking for the silver bullet or the next craze to sweep Wall Street. This is especially true now after the losses most people experienced over the last couple of years.

Two recent Wall Street Journal articles give credence to the effectiveness of the buy and hold approach. The first was an article by Jason Zweig in his Intelligent Investor column dated Saturday, March 6, 2010, titled “A Star Trader Who Rarely Ever Traded”. The article was about John Laporte who retired from managing the T. Rowe Price New Horizons fund. Mr. Zweig noted that “An investor who put $10,000 in the fund when Mr. Laporte took the helm, three weeks before the crash of 1987, now has $78,000; the same investment in the Russell 2000 Growth index of small-company stocks has grown to just $ 52,000.”

Mr. Zweig wrote that Mr. Laporte seldom traded, holding the average stock for four years, whereas the typical small company stock fund traded stocks every nine months! Mr. Zweig went on to say that the New Horizons fund held two thirds of its top twenty holdings for at least five years each. He summed up his article by saying:
“… many individual investors try to beat the pros at their own game – a fruitless effort, since fast trading is a game even most of the pros can’t win.” As Mr. Laporte’s career has shown, less is more.

The second article that supports the buy and hold approach was written by Sam Mamudi in the Fund Track column of the Wall Street Journal on March 5, 2010, titled “Buffett’s Gains Beat Every Mutual Fund”. In Mr. Mamudi’s article he reports that Warren Buffett said his Berkshire Hathaway stock has returned 22 percent annualized gains over the last 45 years! Mr. Mamudi says that the two closest funds returned 16.3% (Fidelity Magellan) and 13.4% (Templeton Growth Fund), not even close to Warren’s performance. According to the article, the 22 percent gain is based on market price but Mr. Buffett prefers to use book value to calculate gains, putting the return at 20.3 percent since 1965.

The article goes on to say that $10,000 invested in Berkshire Hathaway on October 1, 1964 would be worth $80 million today, whereas $10,000 invested in the Fidelity fund would be worth only $9.1 million today. The article discusses the advantage that Berkshire has because it can take a long-term approach on its investments whereas mutual fund managers are often pressured to buy and sell more often in order to achieve good yearly performance. Warren approaches investing as though he is an owner of the companies he invests in and not just an investor. This long-term view has served him well.

There are some managers who can time the market, at least in the short-term, but few who can continue to do it over the long haul. For most, a buy and hold strategy seems to be most effective. It’s tough to ignore the success of Mr. Laporte and Mr. Buffett whose long-term, buy and hold approaches speak for themselves.

Note: Inclusion of any particular mutual fund in this article should not be construed as a recommendation by Patterson Advisors. We recommend readers seek the guidance of their own investment advisor before considering any investment.


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