Mark Cuban (billionaire) puts it more bluntly: “Buy and hold is a crock of $%#!”
To understand why Buy and Hold won’t work in the future, we first need to understand why Buy and Hold worked in the past. What has driven stock market performance over the last 3 decades? Can we rely on those same drivers over the next 30 years? What new drivers need to be factored into stock market performance going forward?
A lot of questions, so let’s get into it.
The stock market has risen 9.8% pa for 28 years
Buy and Hold Is Dead – 1979 to 2007
From 1979 to 2007 the S&P500 index achieved 9.8% compound growth per annum. We’ve been in the middle of this tremendous bull market for so long we’ve come to think of this kind of performance as “normal”.
To see if this performance can be sustained we need to understand what drove these incredible returns in the first place.
The components of that 9.8% pa growth were as follows:
- 3.9% – Inflation & pricing power
- 2.4% – Lower interest rates
- 2.0% – Productivity growth
- 1.1% – Population growth
- 0.6% – Lower corporate tax rates
As you can see, some of the contributing factors were once-in-a-lifetime shifts. For example, interest rates declining from the high teens in the 1970’s to almost zero in the 2000’s. And corporate tax rates coming down to historic lows too.
But that same performance is unlikely going forward
Buy and Hold Is Dead – 2007 to 2020
Going forward, many of the components identified above will not be as generous – and some will reverse and hold back stock market gains.
If you made the following assumptions about the contribution of each component:
- 2.0% – Inflation & pricing power
- 1.0% – Productivity growth
- 0.6% – Population growth
- -0.2% – Higher corporate tax rates
- -0.6% – Higher interest rates
… Then the forecast stock market performance would only be 2.8% compound growth per annum. A far cry from the 9.8% of old and putting pension funds (for one) under severe pressure going forward.
Maybe there’s a huge future bonus I’ve missed – energy revolution, nano-technology, stem cells, smart phone apps, etc. I for one can’t see it. Don’t get me wrong, I’ll be glad if there is but in the meantime I’ll plan for what I see and not rely on Buy and Hold.
The message is now getting louder
US GDP Growth Forecast (Source: GMO, 3Q 2012)
In November 2012, Jeremy Grantham of GMO forecast that US economic growth will be less than 1% for the next 40 years. The factors driving the near-zero growth include:
- Population growth has peaked and man-hours worked will stagnate
- Service productivity is low and declining
- Resource costs are rising and are likely to accelerate
- Climate change will become increasingly unfavorable
A year earlier, in November 2011, Chris Martenson released an excellent presentation, talking about Why the Next 20 Years will be Marked by the Collapse of the Exponential Function.
And now in 2013, macroeconomist Robert Gordon predicts US growth will only be 0.2% in this excellent TED presentation: The Death of Innovation, The End of Growth.
Under these future scenarios how can the stock market continue to grow at 7-10% pa? If Buy and Hold is Dead then what’s the alternative? Trading – that is, active management of your investments. Not relying on an advisor or your broker. Looking out for yourself and paying attention to what is happening in the market.
Even Howard Stern rants about Buy and Hold
Howard Stern on His Stockbroker and Buy and Hold
Some of the good bits: “I go into this stock market – it’s a joke … And these guys they never sell anything, all they do is buy. When it goes up, sell it, return some of the money to me! No, no, no way, keep it in – keep it in to the bloody end … My guy holds, it’s unbelievable!”
Reader comments on ‘Buy and Hold Is Dead’
“Great video, thanks Barry.” Faris S.
“Just wanted to tell you this video is excellent! Thank you!” Ed D.
“I just wanted to say your speaking style and teaching capabilities are just superb. It is so easy to listen and learn from you. It is fun to go back and watch the past videos and I appreciate all the work that goes into making just one – not forgetting you do this almost every day plus trade plus the website plus … Thank you.” Paul M.
“I’m really in line with your view from your last video. The western world has serious structural problem to solve. That’s Kondratieff’s winter. Any sensible investor has to know that or leave the market, asap … The west is in winter, but in the meantime, we’ve got to keep in mind the east and south is catching-up quite fast and they’re not in winter, they’re arriving in summer, and their weight in the world GDP is growing at an exponential compounded rate. Will the west be clever enough to sort out their issue and move into a new spring in less than a decade in order to have a spring fuelled by the east summer, or will the west be left behind, and become the “declining markets”? – could a nice brand for a long term short investment fund … So my view for the next few year is more a shift of wealth from the west to the east. This has started, it’ll take a long time, and will create chaos and volatility in the markets, in politics, in democracy and surely in military actions. Which doesn’t look like a bright future.” David C.