Over the past several years, we have been hearing a somewhat common theme from the financial media and pundits alike – BUY & HOLD is dead. After two significant market crashes in less than a decade, many investors were all too eager to buy into to this new mantra. It became a common theme from those in the business of selling news, complex trading programs, or even just straight hysteria, that the decade from 2000 to 2010, which they dubbed ‘The Lost Decade,’ had not yielded regular investors a return and that if everyday people wanted to actually earn a return on their capital then they had to adopt new and complex trading strategies (in our experience these types of strategies have only served to lose investor money).
KeyStone has always advised investors to ignore the daily noise perpetually emanating from the markets. Market noise can take the form of price volatility, media headlines and buzz terms, or so-called experts shouting strong but unsubstantiated opinions. But whatever form it takes, it typically only serves to distract people from the long-term objective of investing in solid businesses that can be purchased at good prices. If buy and hold means buying a stock and forgetting about it for a few decades then not only is it dead to us, but it was never alive. In this context however, the strategy of buy and hold was sold by many members of the media and financial community as anything that didn’t involve continuous trading (whether daily or monthly) and a need to sit in front of your computer terminal for any minute the market was open.
We first started hearing about ‘The Lost Decade’ at the outset of 2010. The recovery from the 2008 crash was still at a relatively early stage and feeling in the investment community was still one of uncertainty and pessimism. Figure 1 illustrates S&P TSX price performance from January 2000 to December 2009. Over this 10 year period, the TSX had produced a meager 3.5% return per year which was well below the 6% to 8% return investors generally anticipated as a long-term average. It was at this point that people started to ask, “Is buy and hold dead.” What many people did not think to ask at the time was whether or not measuring average return from the near peak of the ‘tech bubble’ in 2000 to the early recovery of the 2008 crash was an appropriate period from which to ascertain a trend.
Figure 1: S&P TSX Price Index (2000 – 2010)
But when the ‘The Lost Decade’ commentary really started to take off was about half way through 2010. At that point we were into the lackluster summer period and the market had declined moderately from the start of the year. The 10 year price return on the TSX was only 0.4% per year which opened doors to those who thrive (financially or otherwise) from agitation to contend that buy and hold strategies absolutely were dead and that our concept of investing had to change. Those who had struggled in the markets over recent years were all too willing to eat that commentary up with many of them believing that they had to become quick and nimble traders and leave long-term, intelligent investment strategies in the rear view.
Figure 2: S&P TSX Price Index (June, 2000 – June, 2010)
Statistically, the argument in favor of ‘The Lost Decade’ was accurate. There was nearly a zero percent return generated on average over the previous ten years (at that one point in time). However, the data used to support this premise was misleading at best. First of all, dividends were never included by lost decade advocates and looking at the charts in Figures 1 and 2 it is easy understand how dividends have accounted for 40% to 60% of total market returns over time. But where we really take issue is with the time period used to back the lost decade claims. As we said, when this mantra really started to gain was about midway through 2010 which means that the measure was taken from the peak of the tech bubble to what was still a market recovery from the 2008 crash.
In the Figure 3 below, we can see that by simply shifting our measurement period forward 6 months we dramatically alter the picture of long-term investment returns. From 2001 to 2011, the average price performance on the TSX improves to 4.4% per year and when we add dividends we get back up to the 6.5% to 7.0% range.
Figure 3: S&P TSX Price Index (2001 – 2011)
When we look at the 10 year return measured from today, the TSX has produced average annual gains of about 5.3% per year and about 8.0% when including dividends.
Figure 4: S&P TSX Price Index (March 2004 – March 2014)
Although we don’t hear much about ‘The Lost Decade’ today (as it was now four years ago), we still see many people (including media and so-called financial experts) cling to the notion that buy and hold is dead and that investors need to be able to trade nimbly. This is in spite of the fact that the lost decade concept was only true for a very brief period of time and based on numbers and facts that were ignorantly and purposefully presently in a misleading fashion. It is unfortunate that many investors were, and continue to be, sold into this fallacy at what is likely a huge cost to their portfolios and financial positions. Investment success is and will always be based on buying solid, profitable companies at reasonable prices and being willing to hold those positions while being inundated with market noise.
KeyStone’s Latest Reports Section
