Buy & Hold Sometimes Works!

[Lawso]

I reckon there's very few things more interesting than other people's money. So maybe a few readers will be interested in the following, and some may even learn from it.

An expat mate of mine asked me last year to have a look at his investments. He had a legacy from his parents' estate in 1999 and put himself in the hands of an "adviser", who placed nearly $200,000 with various funds managed by Armstrong Jones, Bankers Trust and Tower. The entry and management fees were pretty horrendous and the timing was a disaster due to weakness in most world markets.

By July last year, when I started to unravel the mess, the original investment of NZD197,500 had withered to $132,970!!

So with a friendly broker I put a stop to the bleeding. We got out of the worst of the funds (Tower and BT), left some with ING, put $20k into local fixed interest and the balance of $70k into nine solid NZ listed companies. There have been no further transactions - a true Buy & Hold!

That $70k invested in Sept '03 now stands at $83,251. Meanwhile dividends and interest have built up in a cash management a/c to $6195. Therefore -
Capital growth + divs = $19,446 = 27.78% in 14 months.
All with no effort, no further brokerage and very little tax.

As a matter of interest here's how the individual stocks have performed - s p growth only, excludes dividends.
AIA +12.6%, CEN 15.16%, FBU 39.9%, KIP 6.7%, NMNPB 11.79%, POT 41.46%, SKC 4.25%, TEL 20.69%, WPT 20.18%.

A result that might have put me near the top of SEC's stock pick ladder, instead of where I am, in the cellar.

[moimoi]

I'll take 27% return any time...

as a matter of interest have you any idea what the return would be if it had been left in the various funds???

cheers
moi

[kura]

To give a better comparison, you should look at performance of the funds that you got out of, then we will have independant confirmation on the merits of your investment strategy. If they were invested in local shares (ie not international type funds) then the return from funds should be same or better than Buy and Hold (aka Hold and Hope) Personally, I think a Hold and Hope investor, should look at a fund, if they have neither time/inclination/ability to make regular judgement calls on wether it is appropriate to switch investments round.
PS: 27% is a creditable result, not to be sneezed at.

[Lawso]

No, I couldn't be bothered tracking the funds I got him out of. They were a disaster. Clearly they will have performed better over the past year or so as world markets have improved but fees have to be a consideration. I can't imagine any managed fund performing better than this portfolio, or a similar group of solid hand-picked NZX blue chips. I reckon the very best that they might have achieved would have been to restore the capital to around where it was at the start in 1999.An alternative for a non-active investor, of course, is an index fund but one that tracks the top NZ stocks is likely to be held back by the likes of CAH and WHS, which i would avoid.

[srotherh]

Good on you Lawso
Reckon it Feels good to help someone else who asks for advise.

[Phaedrus]

Well done Lawso. My view is that your success is due to your stock-picking skills though, rather than a "Buy and Hold" strategy.
B&H really comes unglued when you get one wrong - and hold and hold.... You have been skillful (or lucky) enough to have got them all right, to a greater or lesser extent. B&H hasn't had a chance to lose you money - yet!
Another point at which B&H falls over is when stocks stop going up and start going down. B&H means that you continue to hold and hold, all the time giving your gains back to the market. You have got some sound stocks there that are in good long-term uptrends, but none of them are going to the moon. Sooner or later their uptrends will end. Your "plan" to deal with this inevitability is to continue holding, no matter how far they may fall.
I think you need some sort of exit strategy here. Without an exit strategy, you really are just holding and hoping, being pushed around by the market - a candle in the wind. Even if you don't like TA based exit strategies, at least look at FA based ones. Some possible examples would be "Sell when the P/E rises to xx" "Sell if the stock reaches 120% of my valuation" "Sell if the yield falls to x%". Anything is better than nothing here. Do yourself (and everyone else) a favour - start a new ShareTrader thread entitled "Fundamentally based exit strategies". Could be interesting.
Would I have any show of talking you into selling the poorest performer(s)? You know you can do a lot better that that - right?

[duncan macgregor]

Gotta agree PHEADRUS an exit strategy is a must regardless of your entry system. Nobody is right all the time. Recognise the fact and keep winning. The warehouse is a classic example 3 yrs ago who would have thought it would be in this position today. macdunk

[Solo]

Are you saying the managed funds are not doing as well because they didn't buy and hold?
Buy and hold works because histroically, the share price always outperform other investment instruments in the long run (more than 15 years), assuming a nation's economy is always growing.
Share price movement in one year time, however, has more to do with the market sentiment and confidence. New Zealand equity market has been performing really well in the past year, it is in a bull market. It is relatively easy to make money in a market like this.
For example, if you bought NZSE50 index this time last year, your will have a 25% return in 12 month.
2001~2002 for golbal equities, however, is very bearish. One bad news after another, sars, 911, war on iraq etc.
However most of the world's equity has been performing OK since 2003, I suspect if you have kept these management funds, their performance may be better than you expected. Having said that, the share market gain overseas would be offset by the strong NZ currency.
Buy and hold makes sense in a bull market, because the opportunities cost of missing a great run is too high.
However, applying the same strategy in a bear market, you may lose a lot more than you have to. It makes more sense to have a stop loss, admit that we have made a mistake, and cut out losses.

[Lawso]

Many thanks, Phaedrus and others, for excellent comments. Remember, I titled this thread "B&H Sometimes Works". I agree this success has been the result of picking sound stocks and enjoying the ride in the local bull market. The friend whose money I invested is not interested in playing the market and asked me to just sit tight. B&H suits him but it's not a case of B & H & Forget. I follow company news closely and would certainly sell for him if I saw, say, another WHS on the radar screen.

As for myself, when I joined ShareTrader a year or so ago I proclaimed myself a Buy & Holder. I've since learnt to Buy & Hold and sometimes Sell. Exited WHS recently at 463 (still a nasty loss, though), PWC @ 212 and MWL @ 175 Having a sensible exit strategy based in my case mainly on FA, company announcements and street talk is one of the things I've learnt on ST. Come to think of it, that could be the theme for another new thread - "What I've learnt from ST and what p*sses me off".

[thereslifeafter87]

Lawso,

Congrats on getting out of WHS before the sh*t really hit the fan.