While buy-and-hold investing continues to draw criticism from some pundits, money manager and newsletter guru Jim Oberweis begs to differ. In a recent interview with The Motley Fool, Oberweis says that buy-and-hold is alive and well, because timing the market remains an incredibly difficult task.
“Show me some quantitative evidence that someone’s right, and then I’m interested,” Oberweis said in response to the buy-and-hold bashers. “I’m a numbers guy. I don’t know anyone who has been able to time short-term fluctuations in the market over long periods of time and make a lot of money doing so. That’s why I think [buy and hold] is still an effective way to play it for most people.”
“Over a short period of time, it’s extraordinarily difficult — intrinsically impossible — to guess the direction of the market consistently,” Oberweis added. “At the same time, we know that over long periods of time, the market has a propensity to go up in value. … There are a few periods as long as 20 years where the market didn’t go up as much as bonds. [But] those are rare periods, and the market produced positive returns in those periods.
Oberweis does offer a couple of caveats. The first is that buy-and-hold doesn’t mean that you buy a bunch of stocks and then hold them forever. “You can buy and hold the market forever, but not individual stocks,” he says. “The individual stocks that comprise the market are businesses, and just like any other business — some will succeed, some will fail.”
The best thing most individual investors can do, Oberweis says, is “set up an asset allocation of investment vehicles that have relatively low correlations to each other and keep that allocation constant — with the exception that over a period of time it becomes more conservative as the individual ages. Usually that plan includes a consistent allocation to equities, which I think you would deem a buy-and-hold strategy.”
The second caveat is that Oberweis says there are certain situations when the market becomes so obviously overvalued or undervalued that upping or lowering your equity allocation can be a good idea. An example: when tech stocks were two or three standard deviations above typical valuations back in 1999.
Oberweis says that stocks also became undervalued by two or three standard deviations this past March, a very bullish signal that many haven’t taken advantage of. “This is a nasty cycle, but it’s not a different game,” he says. “The rules haven’t changed. If anything, the practices of investing for the long haul are more important now than ever. People run into trouble after a major correction by selling equities. When you have a major correction, that’s the time to increase your exposure to equities because that’s the opportunity to buy stocks at much lower-than-normal prices. Very few people have the intestinal fortitude and discipline to do that.”