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Friday, 24 September 2010

No, Buy-And-Hold Is Not Dead, Says Tongue--It's Just Sleeping

After more than a decade in which stocks have gone nowhere but down, investors can be forgiven for asking whether the money-making mantra of the 1990s, "buy and hold," is dead.

No, it isn't, says Glenn Tongue, a general partner at Tilson Mutual Funds. It's just that, if you're buying on price, you have to have a different time frame than traders who are gauging "momentum" or "sentiment" and other factors that drive the market's movements over the short term. Specifically, you have to be willing to wait years for stocks to gravitate toward their fair value.

This fair value, by the way, can be above or below the current market price. "Buy and hold," in other words, works the same way when you're betting overpriced stocks will drop: You may be right, but you may also be waiting a while.

In the late 1990s, stocks were extremely expensive on a number of measures, including the price-earnings ratio. These high prices suggested that the market would perform poorly over the next decade, and indeed it did. But predicting the enormous up and down moves in the interim was a different business altogether.

Right now, Tongue says, the market as a whole may not be attractively priced, but many individual stocks are ideal for buy-and-hold investors. Tongue cites Microsoft (MSFT), BP (BP) and Johnson & Johnson (JNJ) as examples.

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