Buy-and-hold strategy does not mean buy and don’t sell

For those who may not know, buy and hold strategy is a proven strategy and is used by long-term investors in hope to benefit from the capital appreciation of the component stocks in a portfolio. It is often associated with Warren Buffet (WB)’s style of investing, especially when he mentioned that the holding period for the Berkshire Hathaway portfolio is FOREVER. It is probably a sweeping statement, but many people had taken it to the extreme that when we buy a stock, we should not sell it. Of course, if we look at the ST index from its all-time high and compare it with today closing of 2869.74 as of 30 September 2016, one would have thought that by adopting the buy and hold strategy, one would have lost more than 25%. But does it really mean that buy-and hold strategy does not work anymore? Not quite. Otherwise, why would fund houses and insurance companies still continue to adopt such a strategy? Remember, these are big fund managers and when they hold a stock, they do not just own 2,000 shares. They probably own 200,000 shares or even 2,000,000 shares even if it means $20 per share. For the fact that they continue to use this strategy means that it is still relevant even with the advent of high-frequency trading computers. In my opinion, if it works for big funds, it should also work for individuals as well. And because big fund managers hold large quantity of stocks, we simply cannot expect them to empty their portfolio of, say 200,000 of OCBC in one day, and then buying it all back on another day on a short-term basis. In fact, most of the time, their portfolios do not change at all. In the way, they are practicing buy-and hold strategies. These fund managers have to think long-term in order to pay the clients and retirees, who are long-term stake-holders. The key here is to think long-term. (Sometimes, I am quite bemused by people who mentioned “Aiyo, must think long-term ah!”. Thinking long term does not mean that we do not sell a stock at all!)

 

Given the relevance of buy and hold strategies for large funds, can small retails players like us mimic the actions of these fund managers to make money? Certainly yes. The fact that we do not hold too many lots per stock, it is sometime easier for us to manoeuvre better than the fund managers.

 

Allow me to go back into my history. After falling and recovering from the bad experience in the Asian Financial Crisis (AFC). (Click here for the detailed history), my aim was to hold this great stock called DBS. On my record, I purchased 1000 shares at $14.80 in February 2004. (In fact, it was less than 10% below yesterday’s closing at $15.39 considering that they are more than 12 years apart.) My long term plan was to have at least 10,000 shares in 10 years. Based on this objective, my shortfall was 14,000 shares. The period between 2004 and 2007 was a fantastic time for stocks because the ST Index advanced all the way from below 2000 to its all-time high of 3,875.55 in October 2007. The global economy was doing so well that one very significant local political personnel was said to be saying “All the pistons are working at full force”, pointing to the perfect functioning of US, Europe and China. (Of course, we know in hindsight that Global Financial Crisis (GFC) came one year later and everything got imploded.) Needless to say, in between 2004 and 2007, if one were on the buy side and sold 1-2 months down the road, or simply buy and hold all the way, he should be able to make money. This is especially true for DBS, which is a good proxy to the stock market. Even though I have a long-term plan to continue to accumulate DBS in the long run, the speed of price advancement was so rapid that each time when I bought it, it became attractive to sell it off some months down the road. In fact, it was prudent to take money off the table because rapid advancements are very often met by rapid pull-backs. In such a situation, I could even say that I was trading, though not exactly short-term trading because each time my holding period was a few months. The share price of DBS in the period between 2004 and 2007 advanced from $14.80 when I bought it to a peak of $25.00. By the end of 2007, however, my shareholding in DBS did not increase at all because I had sold just as much as I had bought it. It was probably with some luck that the Global Financial Crisis (GFC) came along that I was able to pick up a lot more shares and subscribe more rights at $5.42. While I did lost some money on paper on the 1000 shares that I kept, it had been more than offset by the capital gains in the ‘trading’ that I made off from the DBS shares that I had bought and sold along the way. Furthermore, the GFC was probably a once in a lifetime chance to accumulate DBS. It came glistening right in front of my eyes. Such opportunities should not be missed at all cost. This was even truer for someone who had been bashed badly during the Asian Financial Crisis (AFC), and only to see opportunities slipped through the fingers from a low of 805 on the ST Index to more than 2000 within a matter of 15 months or so. (Click here to view my background).

 

Of course, one may argue why I did not even sell off my 1000 shares that I had been holding. The reason is simply that I am not GOD. (There is a Cantonese saying – 早知就没黑衣) I can’t predict the future. If I could predict the future, I would have even sold my 1000 shares and bought it back at the peak of the crisis. My long term plan, however, was clear that I needed to accumulate DBS shares in the long run, and the GFC provided me an opportunity to do so.

 

Then another opportunity came knocking again. After the GFC, DBS advanced again past $20 by late December 2014. Having come up from a relatively low base during the GFC, I managed to sell some shares at $18.50 in October 2014. At this share price, it would have translated to more than the market capitalisation of DBS before the GFC when it was at $25.00. (The reason was that DBS raised rights of 1-for-2 shares during the GFC.) I would have thought that the share price would not go beyond that point, but the general optimism pushed the share price further up to past $20. I sold again at $20.20 in December 2014. It finally reached $20.60 in early 2015. Of course, the crash in the oil price and a series of ‘scares’ in the last 18 months or so, made the share price of DBS came tumbling down again to less than $16, which now becomes a super strong resistance level. When it reached a level of around $13/$14, it allowed me to buy back those quantities and even more than I had sold.    

 

In a similar way, I have been reducing my SPH shares for the past 1-2 years because I felt that the fundamentals of SPH are weakening. It is not because of bad management or SPH was making wrong investments. In fact, I believe that the management has been quite good, peppering shareholders with good dividends. That was why the share price has been quite well-cushioned enabling me to sell a bulk of my stocks off at above $4.00, except for the last 2,000 shares which I sold recently.  The fact is that media and publishing business is under a huge threat from the internet, which is highly accessible locally. The threat is beyond their control and that is why the profit from the print business is dwindling. The only thing that probably helped them along is the SPH REIT, which probably had already hit a plateau. Of course, SPH is not sleeping and is on a look out for fantastic investments that may pop out along the way, but until today, it is still not there yet. Of course, when the price becomes attractive again, Perhaps, I may be back in again.  

So in summary, buy-and-hold does not mean buy and don’t sell. Sometime, it is prudent to sell and take money off the table even if the stock has not reached its full potential. Very often, there is a need for stocks to digest a bit before they can climb further. In fact, as it is DBS is now hovering for the past six months or so below $16. If I had not sold anything and stood only on the buy side from 2004 till now, I probably would have made only from my dividends and not too much from the capital gains. It is the long-term strategy and, of course, some luck that counts. It does not mean buy and don’t sell.

Good Luck!

 

Disclaimer – This post is not a recommendation or an advice to buy or sell the stocks mentioned here-in. These are past performances. They do not reflect future performances. 

 

Brennen has been investing in the stock market for 26 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.