It's Not One Or The Other

Seeking Alpha republished a post from a site called Portfolioist (very clever name) about what seemed like a dichotomy between buy and hold and tactical asset allocation. Some people think buy and hold is dead and other people (namely a quote from Jason Zweig) think that tactical asset allocation is bunk or has yet to prove itself leaving the investor stuck trying to figure what is best for them.

To the extent this is how the debate is being framed it is a false dichotomy that serves almost no practical purpose.

Buy and hold is no more alive or dead than it ever was. When an investor buys a stock (so not a trader) I would think they would want to hold it forever. Being so correct about a stock pick that it never needs to be sold means no taxes and no future trading expense. Plenty of people buy stocks this way. They did this in the 1980s and even during the 2000s. When a stock is bought and the intention is to hold forever that purchase is still subject to proving out to be right or wrong no matter the decade.

I'm sure that back in early 1992 one investor might have bought Dell Computer thinking it was a hold-forever stock while on the same day someone else bought Novell with the same intention. The charts tells it all. From early 1992 until late 1999 DELL went up 12,000% and NOVL went down 24%. Perhaps with hindsight bias DELL was the obvious choice but Novell was plenty popular back then.

There were even buy and hold stocks that worked in the 2000s. An easy example (because we have owned for clients for many years) is Vale (VALE). Yahoo Finance goes back to March 2002 and from that date forward it is up 1400%. While that pales next to Dell's 12000%, VALE did make for a great hold despite a huge decline in 2008. If you are a long term investor with mediocre stock picking skills (mediocre can be good enough when combined with an adequate savings rate) then some picks will generally work out as hoped for and some will not. Regardless of what is going on in the world and the market a long term investor is unlikely to need to sell one that is working out as hoped for (more on this below) but will need to sell one that is not--again no matter what is going on in the world.

The above is sort of the building block for then layering in tactical decisions in the portfolio. Long time readers will know I've owned Statoil for clients for many years. It was clearly bought with the intention of holding forever but over the years there have been occasions where the position needed to be altered for varying reasons. There can be news events, price swings or cyclical reasons to alter a position. With Statoil the stock obviously got ahead of any reasonable valuation in April 2006 and May 2008 so partial sales made sense. The stock then got behind any sort of reasonable valuation in October 2008 so increasing the position made sense. The long term story never changed but some market dynamics were changing, requiring action in my opinion. Coming to an opinion on these sorts of things requires ongoing monitoring and understanding of what you own which is a different form of study from learning the stock the first time.

Another example of a long term hold that did not work out was Plum Creek Timber (PCL). I bought it believing in the diversification benefits of timber (I still believe in the concept) and also as a low vol, high yield name and it did serve those purposes and was a fine hold. However the supposedly low correlation started to go away, slowly as more people clued in to this potential benefit in owning the name. Where low correlation was one of the objectives and that stopped being the case in the manner I hoped for it became a sell in late 2009. In this instance I believe it was working out for quite a few years and then it just changed.

I could give countless examples on both sides of the ledger but the point is that in any environment a stock can work out as a great long term hold and in any environment a stock can not work out. The odds of a tech stock, like Novell, not working during the 1990s have to be very low yet it was the case and obviously Dell eventually became a sell too.

On an unrelated note is this article about a Russian defense company going public. The company is OAO Russian Helicopters and apparently many of the helicopters are for military use. I find this to be a fascinating world is getting flatter or circle of life type of thing. I don't know anything about the company other than the article but the story just fascinates me.