The Rational Investor #003: Jeremy Siegel on Buy-and-Hold Investing
Happy Saturday to you,
Welcome to the 3rd edition of The Rational Investor Newsletter.
Today’s passage comes from the Sixth Edition of Stocks for the Long Run by Jeremy Siegel and Jeremy Schwartz. This book is and should be part of the educational canon of every long-term investor—and most certainly for every advisor. I highly recommend it.
Onto the main event…
Here’s Jeremy Siegel on the Value of Buy-and-Hold Investing (emphasis is mine):
“Optimists on the market are regarded as Panglossian, well-intentioned, but simple-minded prognosticators who push feel-good forecasts with no appreciation of the risks found in history nor the actions of malevolent governments, corporations, or other destructive institutions.
Since the natural disposition of most individuals is optimistic, those who present a pessimistic picture of the future are often assumed to possess special insights, which make them more believable. Seers who accurately predict market crashes are given special praise, even if virtually all their other forecasts are dead wrong.
Joe Granville was lauded for his 1982 bear market call but remained staunchly bearish during the tremendous bull markets that followed. Elaine Gazarelli warned of the 1987 stock market crash, but missed virtually ever market move subsequently. Others praised Alan Greenspan’s famous “irrational exhuberance” call, in December 1996, although it occurred more than three years before the market peaked.
I find many who boast accurately predicting market crashes rarely tell the “back end” of their investment strategy: When or if they every got back into the market? Late in February 2020, I went to a dinner party where a physician said that the coronavirus was going to cause a disastrous pandemic and sold 100 percent of his stock portfolio. In the next month, as the spreading virus forced most into isolation and stocks crashed, I admired his foresight. But a few months later, when the market climbed above the level stocks had been when he made his warning, I learned that he had not reentered the market. Once again, the buy-and-hold investor outperformed those who might accurately predict market downturns.
Even investors who recognize that bear markets are temporary find it most difficult, if not impossible, to take advantage of short-term fluctuations. One money manager I know added to his stock position from cash as the market fell during the coronavirus pandemic, correctly assessing that the sell-off far exceeded any rational response. Of course, this strategy caused the performance of his portfolio to trail the popular averages. At the bottom, his lead investor, exasperated by his large underperformance, bailed from the fund, forcing him to close. Despite the fast recovery that fully vindicated his strategy, irreparable damage was done.
In short, our inherent psychology militates against the buy-and-hold investor. As events shake the world markets, the strategy of “doing nothing” seems counterintuitive, if not downright irresponsible. Yet data have shown that attempting to “time” the market is a fool’s errand, and the buy-and-hold approach is the best strategy.”
To paraphrase Churchill, “Buy-and-hold investing is the worst form of investing—except for all the others.”
A great question you can ask yourself any time you are considering making a change to your investment approach in a market punctuated by fear or greed is, “Might this strategy cause irreparable harm to my long-term returns?” If an answer of “yes” is a possibility, it’s probably best to refrain from making any changes.
Buy and hold. Simple and effective advice that’s perpetually hard to follow.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
Enjoy the weekend!
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