Ok, we have all have heard it , buy and hold stocks for a long time. The usual logic is any of the following or a combination of :
- Businesses cannot change overnight (weeks/months).
- Power of compounding
- Short term is speculation , long term is more rational
- Average through pessimism and optimism
- Some other stuff like save taxes, make it simpler etc etc
Lets take the first reason. Businesses cannot change overnight hence be patient or be invested for a longer term. Problem with this argument is that on certain occasions the stock price is not reflecting the business state. So there maybe a re-rating of the stock or a de-rating and the stock price movement can be spectacular. Lets say you buy a cheap stock at 100. You identify a business trend that can alter the current state of business for the company before the general market does. Market realizes a bit later and the stock can run up, even to 300 within a period 6 months. Now you ahave 200% return in 6 months and nothing has changed in the company fundamentally. Will you sell? Or will you wait for the comany’s fundamentals to change and compound the stock price from 300 till say 1000 in the next 5 years. Which is a 10x but only a 3.5x from 300, which would take 4.5 years. A 10x in 5 years is great no doubts but its actually a 3.5x in 4.5 years which is more reasonable. Where am I getting to? Stock prices move non-linearly especially mid and small caps where my interests are. It hardly moves in a systematic fashion. Plus there is another important factor. Will a 3x become a 10x in the first place. What if your initial premise is wrong about sustained fundamental change in the company. Shouldnt you be content with a 3x in 6months or 1 year. Its an interesting question for which there is no right answer.
Now lets consider the next reason ,Power of Compounding. I understand this but isnt the power of compounding is only for your own wealth and not a particular company that you are stuck to? What if in the previous example , you can jump after the initial 3x to another stock that can compound better now that your initial pick has already gone up beyond reasonable/logical explanations? Are we mistaking power of compounding to a company’s fortunes rather than our own wealth. Its another thing to ponder about.
Next is the reason, short term is speculation and long term is not. This cant be farther away from the truth. Everything in the capital markets is speculation right from value investing to trading. Yes I said it. Dont we in value investing try to assign a value to an asset as though its a science ! Far away from science. In growth investing we try and speculate future trends and in trading i dont need to say much. Atleast the traders know that they are speculating whilst the investors think its a science.
Finally the reason of averaging through market cycles is bullshit. This is the MF manager sales pitch. Does this mean that the fund manager does not to value a stock to predict whether its over valued or fairly valued. The fear of drying up of inflows invents concepts like this. The SIP is a good process for the average joe but not for a person who calls himself a professional fund manager. Reasons for being mediocre and plain greedy.
My only piece of advice is that its your money, you know what needs to be known. Dont seek invented concepts from so called experts. Happy bull market !!! ( Dont worry, everyday someone will be calling a top, and get it right one fine day. He will become popular all because of luck ).