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Why Not Just "Buy and Hold?"
Because "holding" sometimes becomes "holding the bag."
We bought Ascend Communications (ASND) at 66 on December 16, 1996. After a brief decline, it rallied to a new high. Everything looked fine. But the rally petered out and ASND started falling, hitting our protective stop-loss at 56 on February 28, 1997 for a 15% loss.
What would have happened if we had talked ourselves into giving ASND a "little more room"—the classic excuse for not taking a loss when you should? By late April ASND had plummeted to 36.125. It then rallied to 60--still 6 points lower than the original buy price. The rally failed to allow any investor who bought at 60 or higher to get out at break-even. Waiting to get out at break-even is very expensive salve for the ego. What you paid for a stock is totally irrelevant. Assess the stock on the basis of chart study and act accordingly. Anything else is an invitation to a big loss. ASND finally bottomed out at 22 on December 5, 1997, with "buy and holders" suffering a 67% loss. Wouldn't it have been better to take a "quick" 15% loss (4 1/2 x smaller), avoid a year of aggravation/frustration and most importantly, use your capital for a better opportunity?
We bought Picturetel Corp (PCTL) at 26.125 on July 7, 1995. The rally topped out at 44.72 on February 22, 1996.
Our profit-protecting stop-loss was hit on March 26, 1996 at 31.75—a respectable 22% gain in 8 ˝ months (30% annualized). PCTL did rally shortly after our stop-loss was hit but never again reached the old high. It then started to drop in earnest and closed on March 20, 1998 at 6.656.
A "buy and hold" approach would have you sitting with a 75% loss rather than a 22% gain in addition to tying up your valuable capital for 2 years and running.
While many investors understand the prudence of selling a stock that isn't "working out," they seem to go brain-dead when it comes to mutual funds. Well, Virginia, there's a time to sell them too—just like stocks.
We recommended Robertson Stephens Contrarian Fund (RSCOX) in our January 23, 1994 issue, buying it on January 24 at 11.21. It eventually hit a high of 17.40 on March 19, 1996, up 55% from the original buy price. Considering it was recommended as a "hedge," realizing a nice gain from an "insurance" purchase was most rewarding.
By early 1997, however, it was clear that the advance was stalling out. Was it just a "time-out" before RSCOX would go higher or was this a "top" forming? There was no way of telling, but what we did know was that if the price started to drop, we'd want to get out quickly. In our May 26 '97 issue we said to sell ˝ immediately (16.42) and recommended selling the 2nd ˝ on a close below 15.85. On June 19 it closed at 15.80, triggering our mental stop-loss. We sold the rest of our position on the June 20 close at 15.65.
Had we employed the close-your-eyes "buy and hold" strategy, we would now have a 16% loss and have had our capital tied up for almost 6 years rather than pocketing a 43% gain and moving on to the next winner. At best, indiscriminate "buy and hold" makes you deaf to any better opportunity knocking on your portfolio door. At worst, it could cost you a goodly percentage of your wealth.