How "buy and hold" guys lost money??

[mahesh2007]

Usually people ask me-” I am holding xyz. The stock is down 50%. Can I hold it? I am a long term investor and can wait for next 5 years!”

If you listen carefully- you will know this is just another case of “not booking losses”. The investor buys the stock on expectations that the stock shall go up and when the stock starts to go down he can’t adjust himself to the “new reality” and finds it difficult to sell the stock. By saying that he/she is “long term investor” he is merely putting up a reason to avoid losses.

Just look at two stocks -Sasken communications and Mindtree Consulting. If you remember when these stocks were listed, the companies were doing good and their issues were hugely oversubscribed . But both these stocks have been in the severe downtrend for last couple of months. Infact, I had advised one reader in moneycontrol to sell Sasken while it was still at around 500 levels.And this had infuriated couple of readers! After all it was their darling stock. To me it was an expected behaviour as no one wants to believe that their stocks can actually go down! Who wants to buy a stock to take a “loss”?

Again this is a case of excellent managements and companies where the stocks have been underperforming. Infact Mindtree is below its IPO price! So if you are still holding these in the hope that they might recover some day, you might be in for some big surprise in the coming days.

Would you like to be a long term investor and hold this stock for next 3 years? Are you sure that these stocks won’t head to 100 or below? Are you sure that recession in US won’t affect these stocks in the telecom services industry? do you know that it took Infosys 7 years to regain its 1999-2000 price? Do you know that WIPRO stock holders who bought the stock at the peak of 2000 bubble are still sitting on loss?

Markets don’t care about future. Future is “unknown’ and “unseen”. It is best to remain in the “present”. Does’t everyone tell you to “live your life in the present”? Following trends is all about that! Those who can’t handle uncertainty can neither be good investors nor traders.


- SageCapital

ye! u r right.
I just want to add the following-

we should not forget that the irrational surge in IT counters during ketan Parekh era (~99-00) was not accompanied by commensurable volume.
Volumes were shoot only after the significant fall in the prices of the counters due to panic selling.
Judicious investor would have never entered at that level without seeing any significant change in the fundamentals.

 

[kkseal]

...Judicious investor would have never entered at that level without seeing any significant change in the fundamentals.

That's a point most investor-bashers miss.

Regards,
Kalyan.

 

[pkjha30]

It seems that whole thread is based on some assumptions.
Trading or Investing are two different class of action based on entirely different set of strategy , time frames and targets.

I suppose there are different styles of trading depending on all the three factors listed. Similarly there are different types of investments depending on all these factors.

Buy and Hold is something which adopts a set of assumptions
such as
Fundamentals of the company are good.
management is good.dynamic
They have solid plans for future growth.
growth drivers are identified and likely to accelerate .
Cash flow/profits are good.
Sector is likely to perform well.
Price discovery has not yet taken place.

Time frame is long as one has to wait for price discovery.

Therefore price targets are decided at each stage.

Stop loss is crucial but in such cases stop loss would be something depending on risk taking capabilities and risk aversion sentiments.

Buy and hold type may not enter a stock when it has already run up. They might seek uncharted territory.

The most important is your portfolio management. What percent of your stocks holding is locked up in such buy and hold category.IF one is convinced then one can use opportunities to sell at peak(part of such holdings ) and buy at lower prices so holding increases and costs come down.Some advocate against it. But contrarian view does have some merit.

As few examples cited in first post may not exactly prove your point.

One person holding one share of infosys would be holding 1024 shares in 2007. Would he bother about temporary downturn in IT sector. What about his bothering about of Stop losses.

In 2004 Areva was available at Rs 60 and Alstom at Rs 45( approximately) See where is the price today.

Texmaco, Thermax had similar price and what about current prices.

On the contrary, there are any number of stocks which have come down heavily. They were premium stocks and darling of traders and investors in bygone eras. Certainly Buy and Hold type would not have bought them when they were at the peak. Also Hold in "Buy and Hold" does not signify hold indefinitely. Only a fool would do that. One needs to keep booking profits and trying to minimise losses.

If everybody was jumping nervously with the market and getting in and out at the drop of hat and made money then all day traders would have been billionaires. As it transpires, 90% of them barely make a decent living. Only 10% are better off.

Even during downturn people make money. Its all about that.

Ultimately one finds one's own style and no strategy is good if it does not make money for you.

pankaj