Buy and hold baloney

Had an interesting Tweet chat the other day about Buy and hold, tactical timing and why majority of mutual fund customers end up losing money.

According to the blog written by FA, bad timing decisions usually result in clients getting meager returns compared to stated returns of the same mutual fund.

This is also called a Behavior gap. My argument was with the use of the word, ‘Timing’.

Panicking and shitting in your pants is NOT TIMING. Joining the party when it is over is also NOT TIMING either. You see, if you are a trend follower (Timing) you would not get butchered in the crash of 2008. Similarly, you would have been long the market the (almost) entire 2009 reversal and 2014 bull run.

For the uninitiated, this is how TIMING Looks.

This line is not drawn post-facto, it forms itself calculating the Average true range.

In fact, this might offend the buy and hold camp deeply and it should, the reason of this behavior gap is INABILITY of BUY and HOLD sellers to comprehend the pain of a severe draw-down. It is a stupid assumption to expect retail investors to hold on to their investments when they are down 50%. This is sheer unethical selling if you ask me.

Buy and hold is not a strategy, it is a HOPE that since underlying current of the economy is UP, in the long run we shall do fine irrespective of our entry.

That 50% draw-down happened due to what happened in the year 2008, sub-prime lending crises. Due to the leveraged nature of the market, one thing led to another and the whole world came crashing down.

When AIG declared bankruptcy, US govt had to come in and bail these people out or else the entire system, including airlines, transport, and financial network would have been shut down and that would have had a ripple effect doing further damage.

Optimists (Buy and hold) people think that it was a BLACK SWAN and a One OFF. This won’t happen again. These things happen once a century. They claim that India is a growing economy and while there may be 20-30% dips along the way, all of them would be buying opportunities.

While I believe in India Growth story and strongly think that our country’s best days are ahead of us, however that does not mean we put blinders on our eyes.

Once in a century events happen every 5 years in Stock markets. Black swans are not predictable in nature, if they were, markets would already price them in.

The concept of greed and fear is as old as the hills and NOTHING has changed. The same forces that led to excesses in US internet bubble and housing bubble are STILL Prevalent. So much so, we have same set of Idiots at helm of operations who got us in trouble the last time.

And so excesses would be there again, on both sides. Bubbles would form and depressions would come. To do a Buy & hold in markets that shift like a pendulum is downright stupid.

I am inclined to believe that Incentive caused bias, literally forces majority of IFAs to propagate Buy and hold strategy as the only viable strategy to get alpha in the market. Any other way, is trying to be too smart and is bound to fall flat on its face.

This is very convenient way of thinking, you get the client enrolled (one time effort), make him commit to a SIP every month irrespective of where the market is and you get to keep the trail commission for the rest of your life without ever the need to adjust or any other hard work that “Adviser” is suppose to do.

That is Not ADVISING, I am afraid. That is selling the easiest product with most commissions which doesn’t require after sales.

This Incentive bias is so entrenched and runs in the veins that from there on, they sub consciously latch on to any news item, any blog, any statistical evidence to prove that buy and hold works and any other method does not. In fact this cancer is so deep, that they even trolled and leeched on an outlier MF ad, which warned the retail not to get butchered as market is in the RED Zone.