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May 16, 2006
Trade Less, Make More
Mark Hulbert points out something interesting in his most recent column. Over the last eighteen months, one of the best-performing newsletters that his service follows has been one called "Closed End Country Fund Report". And here's the twist: It hasn't published in the entire period.Matter of fact, the newsletter last published in October 2004. And that leads Mark to do some mulling:
Granted, this is a kind of back-door rediscovery of "buy and hold", but it's still interesting. As always, less is more in the capital markets.These lessons have emerged on any of a number of occasions over my 26 years of tracking investment newsletters, though never as spectacularly as in the case of [Closed End Country Fund Report]. On several occasions, for example, I have compared newsletters' returns in a given calendar year with hypothetical portfolios that simply bought and held whatever those newsletters were recommending at the beginning of that year.
I found that these hypothetical frozen portfolios far more often than not came out on top.
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Buying and holding is definitely more appropriate for a nice long secular uptrend, like the one that is dying a violent death as I type. But as today's market action shows, that ain't always how the dance goes.
F'rinstance, how many folks will be buying and hold through action like this (from djindexes.com):
"What many investors don't know is that the 1930s were also the most volatile decade on record for stock prices. Investors, their nerves rubbed raw by the Depression, were prone to fits of euphoria and despair.... Thus, the industrial average plunged 52.7% in 1931 and 32.8% in 1937, but it rose 66.7% in 1933 and 38.5% in 1935. Daily volatility was also intense. Strange as it may seem, seven of the 10 biggest up days in history, on a percentage basis, occurred during the 1930s."
Methinks a more nimble strategy with a strong expected value focus would perform a wee bit better than buy and hold in such a climate.
Not quite buy-and-hold, rather a once a year chance to change the portfolio. Which suggests a question: are those once-a-year snapshots outperforming appropriate benchmarks?
Perhaps the newsletters are picking stocks that underperform in the short term and then rotating out of them; over a longer period, the impact of the short-term underperformance would be lessened by a following period of (say) average performance. Here, buy-and-hold-for-a-year isn't allowing one to benefit from superior stock selection, rather it is limiting the damage one is doing from poor (short term) selection.
If you're bad at something, maybe you shouldn't do it so much.