In part three of the series investigating the underlying message of Vanguard Founder and Passive Investment idol John Bogle we will take a look at the principle of Buy Right and Hold Tight.
I think that this finally is reaching a place where we could see a strong difference emerging between the Active Investing habits of a Value focused trader rather than a long term Buy and Hold strategy- or is it?
The founding principle behind buy right and hold tight is that you pick a company that has solid fundamentals, strong management, a solid business plan and competitive advantage. A company that you feel is not part of the ‘get quick rich’ boom and bust profit cycle. To me these are firms like Exxon Mobile, Coca Cola, Ford etc. They have a strong core business and have proven to have the wherewithal to survive tough times.
In fact as I write this I start to think that this is more of a Value Investment approach to picking companies, rather than an entire Index as Bogle advocates, for in an Index you aren’t necessarily buying ‘right’ you are buying ‘everything’.
A Value Investor would look at the current price of a stock and determine, based upon their own set of criteria, if the stock presented an opportunity to purchase at a lower price than its true value, and would then be waiting for the stock to revert towards the mean and provide profit, the difference between the Value investor and the Passive Investor is that the Value investor might start getting worried as the price moved too far beyond the mean in the other direction – IE if the stock was appreciating, they would become increasingly concerned as they know that such things should revert towards the mean again at some point, and as such a drop is coming.
The advice here, of holding a stock and ‘Holding it Tight’ when all of your research should indicate that it is overpriced is unusual to me. I think that there is wisdom in the notion of market timing being an almost impossible challenge, but I think people can get it kinda right, and that kinda right is often more than enough to ensure success in a transaction.
When I like the idea of Buy Right and Hold Tight
I like the idea of holding when its all going horribly wrong. When the market is crashing and you are panicking and worried -that is the time to keep a cool head- you have already missed the time to get off the boat, now you are in for the ride. As Winston Churchill once said, If you are going through Hell, keep going! There will be times when this happens, when the market sinks and your stocks are hammered.
The thing is though, the stock you own is being hammered because of market demand, not because of fundamentals. So once everyone stops running around like headless chickens they will realize that the same good stocks are the place to be, and you will see a return to your former highs. A value investor would use the crash as an opportunity to buy more. If they like Ford at $20 they LOVE it at $10. That is a very different approach to a person who just panics and sells at $10 to save their retirement, then gets back into the market when Ford is at $30…
Part 3 leaves me wondering, if we are buying right, surely price is a key component here, and as such we should be thinking about value and timing.
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