Rumors of the demise of 'buy & hold' investing are greatly exaggerated, to say the least.
Purveyors of market timing would like us to believe that this investment strategy is no longer relevant to the pandemic dominated market environment.
Vaccine discovery hopes had lifted market sentiment even before the regulatory authorizations arrived, with the successful start to the inoculation exercise helping cheer us up even though the scourge is still very much all around us. The associated air of optimism has been a boon for the stock market, pushing the major indexes to record levels.
The resulting stock market investing experience for the thousands of new investors that entered the market during the pandemic has been nothing short of heady. With this all-around sentiment positivity lifting all stock market boats, investors are at risk of reaching the wrong conclusions from their recent success and discarding long-held investing beliefs, including the virtues of ‘buy & hold’ investing strategies, as no longer relevant.
It is important to remember that long-term investing, particularly a 'buy & hold' approach, remains as relevant today as it has ever been. And notwithstanding naysayers' claims to the contrary, empirical evidence continues to show the long-term superiority of a 'buy & hold' strategy over any other investing approach.
But to adequately benefit from this tested and proven strategy, investors need to guard against three major pitfalls. Here they are:
1) 'Buy & Hold' Doesn't Mean 'Buy & Forget'
Staying engaged with your portfolio is a must. Investing for the long run doesn't mean that you lose sight of developments in your portfolio. The 'buy & forget' mantra is a simplified take on the typically long holding horizons of investment icons such as Warren Buffett.
Buffett may be in the habit of keeping his investments for the long term, but he stays fully tuned into what's happening in each of his holdings. While the Oracle of Omaha is no doubt one of the most successful and famous exponents of the 'buy & hold' investing approach, he is by no means the only one. All of the successful practitioners of this approach stay well informed of what is going on with each of their holdings to make sure that the primary reason(s) why they picked the stock(s) was still valid. This helps them avoid unnecessary changes.
Let me give you an example from the Top 10 Stocks for 2020 portfolio that follows a calendar year ‘buy & hold’ strategy. The portfolio did extremely well, outperforming the broader market more than 7X. But one of the software stocks, HubSpot, lost more than a third of its value through mid-March as the pandemic took hold. I didn’t ignore the sell off, but my due diligence convinced me that while the near-term outlook had undoubtedly worsened as a result of the pandemic, the long-term thesis still held. Our level-headedness paid off, with the stock up close to +150% this year. SiteOne Landscaping (SITE), another Top 10 for 2020 stock, had an even bigger sell off through mid-March, but eventually recovered and will end the year up in excess of +70%.
More . . .
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2) Don't Fall for the 'Buy What You Know' Mantra
Guard against the simplistic beauty of the 'buy what you know' mantra; another one of those skin-deep lessons learned from Warren Buffett's investment style.
Adherents of this 'philosophy' load up on stocks from a bunch of companies whose products they use. And then they keep those stocks forever, a la Buffett who has famously hung onto his investment holdings for years.
Being familiar with a company's product(s) is a useful, but not necessary, starting point to 'knowing' the stock as an investment opportunity. The decision to buy the company's stock should follow a thorough, due diligence process that gives you a solid appreciation of the company's prospects, competitive position and the proper value of its stock.
Let me give you the example of DocuSign (DOCU), a stock that we picked for the Top 10 for 2020 portfolio. I had never used the company’s pioneering e-signature technology, but that didn’t mean I couldn’t evaluate the company as an investment opportunity. The stock became a huge success, up more than +200% given its role in enabling transactions in the pandemic, a scenario that we never envisioned when we picked it up. But what we could envision was the quality of its technology and the benefits accruing to it as a result of its first-mover status in the space.
Sea Ltd. (SE) is another example from the 2020 portfolio that turned out to be a home run for the portfolio, up more than +350%, but was otherwise an obscure foreign company whose services we had never personally used.
Studies show that people have a crippling blind spot when it comes to stocks that they think they know. Too often they will overlook the negatives of the firm because they have fallen in love with the stock. Love is nice in your personal life, but there is no place for passion and emotions while evaluating stocks.
3) Stick With a Plan
Avoid haphazardly or randomly filling your portfolio with stocks you like. Always build your portfolio around an investment outlook and stay ready to make adjustments should that outlook change.
I am not suggesting that you need to have an elaborate and explicit outlook for GDP growth in the next quarter or year, but you absolutely need to have a base-case sense for the economy and the market.
If you expect a major economic downturn in the coming 12 - 18 months, your choice of investments would be very different from someone looking forward to a goldilocks-type scenario.
We had no idea that a once-in-a-century pathogen would hit the U.S. and global economies as we put together the Top 10 Stocks for 2020 portfolio.. We were looking for a steady-as-go economy, with a combination of rising corporate earnings and low interest rates helping push stocks higher. We picked off-the-radar stocks for the portfolio that came from diverse parts of the market, but enjoyed unique competitive advantages in their respective spaces that promised multi-year growth trajectories.
DocuSign (DOCU) may be well known today, but it was far less so a year ago. Same goes for SE Ltd. (SE), a Southeast Asian online player, SiteOne Landscaping (SITE), a consolidator of the landscaping supplies space, DexCom (DXCM), maker of a mobile diabetes device and many others.
And you must stay nimble and flexible enough to adjust your positions should your outlook change.
Putting It All Together
Please keep each of these pitfalls in mind while putting together your stock portfolio to increase your odds of success. We do the same in our annual 'buy & hold' portfolio that we create and maintain every year. We call it Zacks Top 10 Stocks, a portfolio featuring 10 stocks that I personally select and then actively monitor on your behalf. We are about to come out with Zacks Top 10 Stocks for 2021.
We construct this portfolio by first taking a look at the economic and earnings outlook. Then we narrow in on the industries that we believe will outperform and stay away from the others. From there, we use our proprietary stock-rating system to help select the best stocks in those favorable groups.
This stock selection process has stood the test of time, producing strong returns in good times and bad. Since 2012, the annual portfolios have returned a cumulative +682.3% versus the S&P 500's +199.9% in the same time period. And Zacks Top 10 Stocks for 2020 is beating the market 7.8X over. It’s up +93.47% with individual gains as high as +396.8%.¹
You're invited to be among the first investors to see Zacks Top 10 Stocks for 2021 when the portfolio is released on Monday, January 4. But please note, the best way to tap into this long-term investing opportunity is to get in on the ground floor. These picks are time sensitive and the sooner you invest, the more you figure to gain.
The New Year brings a host of challenges and opportunities for the investing public. But rest assured that the stocks we have picked for 2021 fully take into account what lies ahead.
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Sheraz Mian is the Director of Research. He determines which valuable data to use to assess winning stocks and funds. He is a contributor for Zacks Equity Research and Earnings Analysis, and is also the Editor of Zacks Top 10 Stocks.
¹ As of market close 12/18/2020.The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.
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