Why Buy-And-Hold Strategy Doesn’t Work for So Many Investors

Interesting IBD lecture on why Buy & Hold can be so costly, and how to use charts to avoid disaster stocks:

-You buy a
stock. Soon, the market suddenly starts to decline on heavy volume.

-Watch what the stock does.

-A pull back to its 50-day moving average in quiet trade, is an okay sign to stay long that name.

-On the other hand, when a stock that "slashes through the support line on heavy turnover," that’s a red flag.

IBD adds:  "Did
the stock trigger any other sell signals such as a downward reversal,
the largest decline since its breakout or a 7% drop below your buy
point? If so, it’s a good time to unwind your position."

click for larger chart

Gateway_incThe example IBD uses is Gateway computer. Its stock soared 3,500% from
the low in 1994 to its all-time high of 84 in 1999 (point 1).

then started its long decline. It went into a free-fall in November
2000, suffering a 63% loss (point 2). Volume was 65% above average
(point 3).

This alone should have been a sell signal for
investors. And the fact that the market entered a bear period should
have alerted them that this decline could continue for a while.

the time March 2003 hit, the stock lost all its gains and more (point
4). After some attempts to rebound, it is now still trading around 2.

Buy-And-Hold Strategy Will Often Backfire
Marie Beerens
Investor’s Business Daily, Friday March 24, 7:00 pm ET

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  1. Alaskan Pete commented on Apr 20

    A simple channel or connecting lows line on the chart would have had you out the day before that MF cratered. IBD articles on charts are way too dumbed down to be useful to anyone with a modicum of TA understanding. It’s like “charts for dummies”.

  2. trader75 commented on Apr 23

    This brings up some food for thought.

    Why would buy and hold EVER be appropriate for an individual stock position, under any circumstance?

    If an investor purchases a stock, it is implied that the investor has some type of informed, research-based opinion on that stock. (Why else would they buy.) Alongside, then, comes a natural obligation to KEEP UP WITH WHAT’S HAPPENING. That ain’t buy and hold. It’s buy and observe.

    But that doesn’t seem to be how things play out. More typically, a buy and hold investor does an initial back-of-the-envelope analysis at point of purchase, cryogenically freezes that initial analysis, and never changes it.

    This is the real problem… half a methodology is no methodology at all. Anyone without a logical approach to risk control is probably cannon fodder… with knowledge gaps much bigger than any single IBD article could address.

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