22 May The Superiority of Buy-and-Hold
The Superiority of Buy-and-Hold
May 22, 2023
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A few days ago I was on a live webinar and one of the other presenters made an important point.
I was in the middle of talking about a long-term stock trading strategy and was using AMZN (Amazon) as an example.
The strategy did a nice job of trading AMZN since the late 1990s.
But that’s when the important point came in.
Buying and holding AMZN since 1997 would’ve returned 3,300%.
An automated strategy with no compounding would only return 435%.
Buy-and-hold has been vilified in this Newsletter since 2013. But buying-and-holding the best stock of the past 25 years would beat an un-compounded automated strategy by a wide margin.
And this is true for any luckily-chosen, high-flying stock.
- Buying and holding MSFT since 1995 would’ve returned 1,685%
- AAPL since 2003 would’ve returned 11,000%
- TSLA since 2012 would’ve returned 9,200%
- GOOG since 2004 has returned 1,000%
- META since 2012 would’ve returned 500%
Those are monstrous, life-changing numbers.
So what gives? Why not just buy-and-hold everything?
Ever heard of Xerox? Its product revolutionized an industry. It became a household name. It even became part of our everyday language. “Xerox it” is the same as “Google it.”
And if you bought and held this revolutionary, world-changing company since 1973, your return would be…
But you don’t have to go back to ancient times.
What if you decided recently to buy and hold Robinhood? You’d be down 78%
Coinbase? Down 85%.
Peloton? Down 74%.
AMC? Down 70%.
Oh, so that’s why.
There is no denying the power of buying and holding a stock that’s guaranteed to go up. While it’s possible to improve most stocks’ performance with an automated system, there’s no way a static system can equal AMZN’s total return.
But that’s total return.
If you just look at the end without considering drawdown, AMZN is amazing.
The problem is: NO ONE COULD ACTUALLY DO IT.
What normal human who looks at his/her stock account could make it through this?
After seeing your stock rise from $0.08 to $5.60 (holy moly), a real person could watch his/her 6,900% gain wither away to almost zero?
And stay in for the next 20 years??
The answer is no. A thousand times no.
Which is why buy-and-hold is for the birds.
First, you have to be extraordinarily lucky to pick the right stock.
Then you have to hold on through the worst drawdowns this side of bankruptcy to get to the promised land.
But there’s more.
Remember our superstar META? It’s returned 500% since it started trading.
If you used the system I was discussing the other day (Weekly chart, 30 SMA, 5 closes above to enter, exit on close below SMA), you would destroy META’s buy-and-hold return by 4x on a risk-adjusted basis.
IF you pick the right stock (which is nearly impossible) and IF you can hold on through a 95% drawdown (almost certainly impossible), buy-and-hold can produce superior returns.
But if you’d rather have no pressure to pick the perfect stock AND lose nothing during big drawdown periods AND possibly make more money anyway, then a system is vastly superior.
In our upcoming Newsletters, we’ll look at some great ways to trade indexes.
Spoiler alert: not buy-and-hold.
Talk to you soon.
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.