Trader mentality run amok?

Two of the sillier expressions I’ve heard a lot lately are “This is a trader’s market, not an investor’s market” and “Buy and hold is dead.” To anyone with purely a trader’s mindset these sentiments are undoubtedly appealing (and, I might add, self serving), but it’s clear that those making such statements don’t understand the concept of “investing,” including many analysts and market commentators who should know better.

For example, just what is an “investor’s market”? The implication is that it must be the reverse of a volatile and choppy one – in other words, a market that (presumably) calmly trends higher indefinitely. The problem is that’s a trader’s idea of an “investor’s market.”

Most investors think in terms of value, with a long-term time horizon, not in terms of whether the market’s currently choppy or trending. So if there’s such a thing as an “investor’s market,” it’s likely to be one where there are a lot of values to be found – such as might be the case, say, after a significant market decline. Like … now.

As far as “buy and hold,” the reports of its death have been greatly exaggerated. While I have to admit I’ve never been its biggest fan – I’ve always felt it was possible to do better with a little more effort – even recent market events haven’t refuted the strategy’s historical basis in investing for the long term. (Hint: This doesn’t mean 5-10 years.)

The approach obviously leaves something to be desired if you buy at the top of a secular bull market and then blissfully expect consistent 10%+ annual returns from your investment going forward. As Warren Buffett and others properly pointed out earlier this decade, after the many years of spectacular above-average gains in the 1990s it was appropriate to expect correspondingly below-average returns in succeeding years.

But now, in the wake of an almost 50% market decline, the cries of “buy and hold is dead!” are much more likely to be a sign of an excellent opportunity to profitably employ the strategy than to turn out to be true. A recent opinion piece by IndexUniverse’s Matt Hougan – Now Is The Time For Buy-And-Hold – makes an excellent case for this.

Still, critics point out that anyone who bought at the 1929 market peak didn’t break even until 1955 – a long time even for the most patient buy-and-holder. This criticism ignores the power of dividends:

As the graph dramatically shows, a buy-and-hold investor who bought a basket of dividend-paying stocks in 1929 and reinvested the dividends would have been back to even in close to 10 years, and well ahead by 1955. And the power of a dividend-stock investing strategy compared to one relying on price appreciation alone remains just as important today.

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