Photo by Anderson Mancini

At this juncture, as the news flow from pundits and economic forecasters grows more and more shrill and jarring, an ever-present “die-hard”, core group of investment believers continues to espouse the (seemingly) timeless wisdom of “Buy and Hold”. They proclaim loudly and in a resounding tone that one should simply buy and hold and ride through the intense and increasingly frequent bouts of volatility, with the expectation that at the end of the day (some 5-10 years later no doubt), one will come out ahead with gains eked from patience and perseverance. My take on all this is – it’s overrated and very misleading. I will proceed to explain why in the next few paragraphs.

The concept of “Buy and Hold” (BAH) relates to buying shares of companies and holding them through thick and thin, all the while with the belief that as long as one maintains a long-term view, one will emerge unscathed. However, the concept is flawed due to the fact that an investor cannot simply BAH (which I call Buy and Forget), as the business of the company may not be able to withstand the vicissitudes of time. In case any reader thinks that I am referring to small or mid-cap companies, this holds true as well for blue chips. Just ask those people who purchase shares of Creative Technology during the dot.com boom in 1999-2000; as Creative was then the bell-weather technology stock and was one of the blue chips. Yet, competition from Apple in recent years has eroded their market leadership, and after the success of their Sound Blaster Pro, they had never managed to come up with a world-beating invention. Instead, Apple Inc. has now taken over as the tech company of choice, as their world-beating iPod and current iPad take the world by storm. An investor in Apple’s shares would also have to follow the company closely to see if future inventions and products can emulate the success of their previous products; otherwise the lofty valuations placed on the optimistic expectations may just crash back to earth. Read more…