Is “Buy and Hold” Dead? Are Stocks Cheap? How Should You Play This Market?
I’ve had some interesting thoughts and discussions regarding the typically buy and hold strategy that you will see recommended around every corner of the investment world. Additionally, it seems everyone wants to tell you that stocks are cheap; therefore, they warrant your investment. I’ll tell you what I think regarding how to invest and play this current market.
Is “Buy And Hold” Dead?
This is an interesting question and it really depends on your goals and your time frame. If you are near retirement, can you really afford to buy and hold something that might not provide much return for the next 5-10 years? Probably not. Now, if you are in your 20s and are fine with not necessarily earning much return in the next few years but have a truly long term perspective, then buying and holding will probably work (stick to your 401(k)).
Me? I guess I’m too impatient and too eager to attempt to outperform the market and/or maximize my returns both in the present and the future. Therefore, “buy and hold” for me is dead… kind of. For me, “buy and hold” only applies to a small group of stocks: stocks with fantastic dividend yields and an almost certain continuing success through the coming years, even decades (I’m only 26!). One of the few stocks that I like in this regard is Philip Morris Int’l (PM). Additionally, I’m attempting to build a portfolio of foreign, high dividend stocks (I will have a post on this soon).
How To Buy A “Buy And Hold” Stock
Because I’m ok to buy and hold these kind of stocks, this does not mean buy blindly and then hold. I only plan to buy these stocks on a significant pull back due to overall market fundamentals. For example, PM has been trading in the $40-42 range for the most part for months. A few days ago it dropped down to $37; as such, I picked up some more shares at $37.50. I’m not in a rush to add to these positions so I can afford to be patient.
The Part Of “Buy And Hold” That Is Dead
Non-dividend stocks are dead when it comes to buying and holding. In this market which is unlikely to have much of a catalyst to create another bull market for some time (the stimulus package will not create another bull market), returns on non-dividend stocks are unlikely.
One stock that I have had to come to grips with is Apple. While the company has never performed better, the stock doesn’t always follow the company, and in a bear market, tech stocks struggle to perform. Apple’s stock will bounce back and in a big way, but when? Do I really want to hang on to a stock that pays no dividend for 3-5 years and wait for a return? The answer is no. However, I will trade this stock, buying on serious dips and sell on bounces. But when it comes to buying and holding a stock like Apple, it just doesn’t make sense in this environment.
A Quick Word On Stocks Being Cheap
If you watch TV or read investment material on the internet, there is much debate around stocks being “cheap”. Many argue that P/E multiples have come down so you may want to consider buying stocks right now. The problem is that earnings are plummeting with each company that announces quarterly results. This means that while prices are down, they are justified according to the huge drop in earnings. Unless you think that earnings are likely to rise in the future, there is no justification for a “cheap” label. If anything, it looks like earnings will continue to decline at least until the foreseeable future.