Why Trading Beats Buy-and-Hold (Even When it Doesn’t)

April 25th, 2018

Recently, we talked about a trend following system on Apple (AAPL).

Even more recently, I got a great email about that post.

The point of the email was a good one: even though the “breakout system on steroids” for AAPL produced fantastic returns, those returns weren’t quite as high as just simply buying-and-holding for the same time period.

Which is true.

However, the key issue here is the buying-and-holding part.

Buying AAPL several years ago and holding it perfectly until now assumes:

1.  That a trader could analyze AAPL a decade ago, and make some sort of confident determination that AAPL’s $24.99 price at the time (4/29/08) would rise to today’s $166.66 (4/23/18).
2. That a trader would continue to hold the ENTIRE POSITION when the stock price dropped OVER 50% down to $12.27 a few months later.
3. That a trader would not be mentally exhausted from the year-long ordeal and wouldn’t jump at the chance to sell out to end the torture when the stock price finally came back to the original entry price in September, 2009.
4. That a trader wouldn’t sell out when the stock doubled its value in March, 2011.
5. That a trader wouldn’t sell everything in a second when the stock price dropped from $85 to $65 in three months amid all sorts of bad news coming out of China (2012).
6. That a trader wouldn’t sell everything in two seconds when the stock price dropped from $130 to $93 in 2015-16 amid negative projections of iPhone sales.
7. That a trader could withstand the constant barrage of articles like this saying “this whole exercise of forecasting sales and other corporate financial metrics is inherently prone to error.”

To hold AAPL through all of that (and more) might be one of the greatest displays of mental toughness in the history of trading.

I don’t know anyone who could do it (including me).

I’ve never met anyone who has done it (or anything close to it).

(I’d love to hear from you if you have).

While buying-and-holding looks amazing on paper, in real life, it’s borderline impossible.

A diet doesn’t work unless we can actually do it. A workout won’t work unless we can actually do it.

Nothing will work unless we can actually do it.

Which brings us back to the AAPL system in my post.

A system is something we can do every day. A system isn’t barraged with constant, manic news articles. A system takes almost all of the emotion out of it.

We might lose trades, sure, but we can just go back to following the rules.

In short, it’s not unreasonable to say that we could follow a system for ten years without any trouble.

Just follow the rules and keep following the rules. That doesn’t seem like a Herculean task at all.

So, yes, there are a few examples of individual stocks beating a system via buy-and-hold.

But a trader would have to get every cent out of that buy-and-hold without a single slip up–which simply isn’t realistic.

One emotional sell-out along the way would give the win to a system.

And it would take ten years of emotional perfection to reap the benefits (which were only slightly better than the system anyway).

That’s why system trading beats buy-and-hold trading–even when it doesn’t.