MUTUAL FUND ARTICLES BY ULLI G. NIEMANN
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Buy and Hold: How to Perpetuate
Your Investment Losses
By Ulli G. Niemann
A recent cartoon in my daily newspaper showed two guys
sitting in a bar. One is saying to the other: "I did learn
something from my broker...how to diversify my investment
While this struck me as funny, there is certainly an element
of truth to it judging by the number of tragic e-mails and
phone calls I have received over the past couple of years.
This was brought home even more so by a reader who responded
with strong disagreement to one of my articles. I advocate
a methodical, disciplined approach to investing in no-load
mutual funds. It keeps me invested during up markets and
on the sidelines during down markets. It was exactly this
approach that got me and my clients out of the market in
October, 2000 and put us back in to take advantage of the
April, 2003 upswing.
Judging from the reader's e-mail it appears that he works
for a major bank and is adamant about Buy & Hold and
Dollar Cost Averaging. Maybe it's the approach he has chosen
and he doesn't like hearing that the emperor is wearing no
clothes. Nothing personal, honestly, but I find it incomprehensible
that anyone, after the bear market and the financial disasters
most people experienced, can even consider such theories.
The results are just too black & white.
Here are his three main points:
1. "There is no real feasible way
to know whether the market is going to be up or down and
when exactly to invest.
2. "The only logical way for an investor to make
money is through the buy and hold approach. This method
is used by Warren Buffett and he has consistently beaten
the best with an average annual return of 29%.
3. "Dollar cost average helps to hedge against
the ups and downs of the market; moreover, one should have
been buying up stocks during the last 3 years, though I
do agree with your cashing out at in 2000. I do not wish
to insult you, but that seems to me more luck than intuition."
It appears that the only thing that I can agree with him
on is, as he says, there is no reasonable way to "know" whether
the market is going to be up or down. However, this statement
also underscores that he is not familiar with trend tracking
methodologies and the idea that one does not need to "know" or "predict" in
order to make profitable investment decisions.
I've put together the composite for my trend tracking index
in the 80s and it has consistently served me and my clients
well by getting us into and out of the markets in a timely
The reader cites Warren Buffett's success. Sure, he is
legendary, but remember that he made most of his fortune
during one of the greatest bull markets. He is probably now
considered beyond good and evil. But what about the numerous
stories in the press over the past 3 years of the heavy losses
he sustained in Coca Cola and other stocks, by stubbornly
holding on to this positions. When you have enough money
invested in a wide range of holdings, you become almost bullet
proof. Do you fit in that category?
Furthermore, Buffet has resources available that the investing
public simply does not have. Saying that he is successful
only because of his buy and hold approach, and everyone following
this technique will be too, is an oversimplification and
does not factor in all the issues.
How many non-millionaires have enough spare capital to
keep buying and holding and buying some more while stocks
plummet? How long can they wait for the upswing when their
cost-averaged holdings will start to show a profit? Do the
math! Yes, the market will eventually turn up. But will it
recover enough fast enough to reverse your losses in time
to do you any real good? If you're 20, then maybe. If you're
60, who knows?
I have received countless e-mails and phone calls from
individuals who have been led astray by brokers, financial
planners and others using buy-and-hold and dollar cost averaging.
Stories abound of retirees having to go back to work just
because someone told them that "the market can't go
any lower" or "let's dollar cost average."
As for his last point, when I gave the signal to cash out
on October 13, 2000, it had nothing to do with either luck
or intuition. I had no clue how good of a call that would
be; I simply let my indicators be my guide. They pointed
to a sell, we considered, and then followed through based
on our experience. We held true to our philosophy and kept
our emotions, speculations, fears or greed out of the equation.
This disciplined approach is what I advocate.
This year it has led us to buy back into the market on
4/29/03. And my detailed analysis and evaluation of a range
of funds led us to select some of the best; my top fund being
up some 50%.
So, not to be cynical, but to me dollar cost averaging
is just a way to spread the pain over a longer period of
time and to cloud the obvious with the hope the market will
turn around tomorrow. After all, it can't go any lower. Can
© Ulli G. Niemann