Thursday, April 9, 2009

More Investors Say Bye-Bye to Buy and Hold

Another in a series along this line ... a "great" development for active traders - not so much for those who actually "invest" or expect to retire from traditional vehicles [Mar 31: Doug Kass - The Death of Buy and Hold?] [I had a couple of older posts somewhere in the archive on this topic but can't seem to locate them]

Generally when I start to see so many people move to one point of view (buy and hold is dead), it brings out the contraian in me (i.e. maybe we are entering a new golden age for buy and hold?) but judging from the instant gratification society and all the new tools (ETFs) designed for gaming positions for hours, or at most days - along with institutional (hedgies) using these tools, I find it hard to believe we ever go back to the "old ways". I do hope I am somewhat wrong as the "casino type" nature of the market is exactly the opposite reason that usually brings one here rather than a gambling hall - in theory you should be able to build an advantage greater than 50/50 in the market...

Specific to the "retail" crowd, a lot of what I read below is disgust with professional money managers - as I've said many times the "traditional" mutual fund model of 100% long, 0% cash worked great for most of 83-99. Since '00, not so much - except for a few pockets of outperformance. But on the other hand, I doubt over the long term many folks who don't put a ton of time, and have a passion for it will succeed on their own i.e. I might not be happy with the job the auto mechanic did, but if I gave it a try I would promptly destroy the engine. The last time I read such stories below of massive influx of retail traders was 1999 - a lot of cab drivers and hair dressers were completely slapping the market silly. That didn't work out so well within a year or two. It will be interesting to see how this era turns out.

Via the WSJ:
  • For much of the past decade, Kenneth Kimmons of Bedford, Texas, was a buy-and-hold investor. He regularly socked away money in mutual funds across his 401(k) plans, individual retirement accounts and a brokerage account.
  • But after watching his investments fall by about 50% last year, he started trading individual stocks and options full-time last fall. He generally buys stocks at the start of the trading day -- lately, it's been bank stocks -- and sells them a few hours later. "I just got tired of putting money away and losing it," says the 31-year-old. He says he's doubled his money since he started trading full-time.
  • The ups and downs of the market are prompting more retail investors to abandon buy-and-hold strategies in favor of opportunistic trading. Some want more control over their money, so they are fleeing funds and advisers -- not to mention the feelings of helplessness raised by recent months' losses. Some are attempting to recoup their losses, while others are stepping back into the markets after a recent string of stock gains and better-than-expected economic news.
  • Most financial advisers still believe investors should stay the course, pointing out that frequent trading can incur fees, erode returns and result in higher tax bills. But many individuals have lost faith in the long-term growth of their investments and are trying to make money off the market's volatility.
  • "When I was younger, I banked on the fact that, over time, stocks will go up, and that if you dollar-cost average [following a fixed schedule of purchases], you'll be fine," says Jim Catalano of Ashburn, Va., who in September rolled over money from an old 401(k) into an IRA at TradeKing, an online brokerage firm with low trading fees. "But my time horizon is getting shorter -- and when you see your 401(k) get chopped in half, I decided I needed to take the reins here and not leave it to the money managers."
  • At the New York Stock Exchange and Nasdaq stock exchanges, turnover levels -- a measure of how often the average share changes hands -- have been rising. At the same time, stock-fund investors sold about 33% of their holdings last year, implying a three-year average holding period, down from a four-year holding period in 2004, according to the Bogle Financial Markets Research Center.
  • Discount brokerage firms -- including Charles Schwab Corp., TD Ameritrade Holding Corp., E*Trade Financial Corp., ING Groep NV's Sharebuilder and Fidelity Investments -- are seeing record levels of trading activity and new-account openings. Since last September, nearly 7.5 million investors -- or 20% of the online investing community -- have increased trading volume enough to be temporarily reclassified at a higher trading level. (that's very interesting)
  • "Typically in a bear market, you'll see a retraction of activity and reduction of people opening new accounts," says Jay Pestrichelli, managing director at TD Ameritrade. "This time around, somebody forgot to tell the retail client that's what happens."
  • Some market experts say retail investors are likely to make a bad situation even worse. "It's a fools' game," says John Bogle, the 79-year-old founder of mutual-fund giant Vanguard Group, which helped popularize index funds and the virtues of buy-and-hold investing. Not only will short-term investors pay more commissions, fees and other costs, but various studies have shown that market timers typically lose more money than buy-and-hold investors. "If you want to trade the market, you've got to be right twice -- you've got to get out and get back in," he says.
  • But others say things are different this time. "The problem I have with the buy-and-hold strategy is that it's a bull-market strategy," say Matthew Tuttle, a financial adviser in Stamford, Conn. "In the bust, you give all of your profits back." Mr. Tuttle has recently taken a more active approach to trading.
  • "The psychology of the market is broken," says Michael Parness, who runs, which dispenses trading advice online. "People just don't trust it." As a result, many of the market's moves are "almost entirely based on whatever news is coming out of the government," he says. (so true, so sadly true)
  • In another sign that investors are getting more speculative, the most widely held stocks in investors' accounts at discount brokerage firms Sharebuilder, TradeKing and Firstrade Securities Inc. are the same ones that are under the most pressure, including Citigroup Inc., American International Group Inc., Ford Motor Co., General Electric Co., and Bank of America Corp. By contrast, the most popular stocks a year ago were Apple Inc., Google Inc., Microsoft Corp. and the like.
[Apr 2, 2009: WSJ - Individual Investors Pile Into Citigroup]
  • "We see a lot of people trying to ride the waves of stocks with no long-term vision," says TradeKing Chief Executive Don Montanaro. "They're so low-priced -- and it's nothing for these stocks to move 40% or 50% in a week."
Student body left... student body right. Rinse. Wash. Repeat. Throw the dice and guess when the next government announcement is. Rinse again. Call me in the morning.
  • Mark Swenson of southern New Hampshire says he typically trades with exchange-traded funds, instead of buying individual stocks. The 40-year-old says he started trading for the first time last October, in part to generate additional income in case his work as a plumber dried up. Although he says he got "slaughtered" when he first started trading, he says that he has since made up much of that initial loss and that it's easier for him to trade than do nothing.
  • "I could no longer stomach it -- watching my money disappear," he says. "For right now, it's a traders' market. Until I get the sense that the market is on the rise, I generally don't plan on doing any buying and holding -- not for the long term."
  • "Nobody can time the market 100% correctly 100% of the time," she says. "However, that doesn't mean you can't get lucky now and then."
Indeed. The Greatest Casino on Earth has turned into that. Caesers New York City. A shame really....


With stocks moving in concert (everyone buy! everyone sell!) it is hard to read much into charts and if any pattern has much to do with individual fundamentals, but Ameritrade (AMTD) does show some strength. If that has to do with a market 25%+ straight up off a bottom or not - who can tell anymore.

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