19 thoughts on “Buy and Hold Can Be Rough Ride

  1. And yet there are people who firmly believe in buy and hold. Those are some major league drawdowns on that chart.

  2. As a trend trader I just can’t listen to any of these guys……
    I could care less what line of BS they come up with regarding their analysis…..
    Pay attention to price, NOT the talking heads…………….
    I don’t listen to the news anymore, I don’t read the news paper, And I sure as hell don’t turn on CNBC.

  3. William, i still wouldn’t understand 80% of things if there were no blabbering heads. I’m not talking about CNBC. Sure i follow CNBC web portal, but i also follow FT, WSJ, Bloomberg, Reuters. Most important thing i had learned in the last year is to read between the lines. Price trend is essential tool but still that trend has to be understood in socio-economical perspective. Computer system is responsible for entries and exits but i still have to know what drives that fluctuations, otherwise i would depend on black box.

  4. Ummm……why does the trend have to be understood in socio-economical perspective exactly? Why don’t you depend on your black box? What if your “understanding” of socio-economic trends prevents you from taking your trades? I don’t mean to pick on your post Patrick but how can you say you wouldn’t understand 80% of things and in the next sentence say it is useless if you aren’t reading between the lines. Bottom line is you are better off thinking for yourself than listening to the clowns on the tube (or sitting next to you in most cases). Isn’t beauty of trendfollowing that you don’t need to understand the reason for the trend, just ride it?

  5. This debate is a conundrum. If you are a trend follower it doesn’t mean you can’t have an opinion on economics and politics. For example, I know a trend follower managing over a billion dollars. He has very opinionated political and economic views. Some I don’t agree with. But his trading? In no way is his trading attached to his political and economic views. His trading is 100% systematic.

  6. I’ll stick with my black box RIX Index that has pinpointed every trend change in the stock market for over 39 years. For the year 2008 The Hulburt Financial Digest ranked my Newsletter 7th. That’s pretty good I think.

  7. Nothing wrong with Buy and Hold. As long as you don’t hold in or buy into a downtrend;)

    As for fundamentals, well why not? Many macro traders use fundamentals to decide which markets to trade.

    But you better develop a robust system that tells you upfront when to buy, when to sell and how much. And it better be a trend following system because that’s the only one that will let you win when things happen that must not happen because they never happened before but still do (such as now and many times before).

  8. My thinking is that at the end of the day you still need to understand the world. Currently i follow forex, commodities and stocks. It just interests me why and whom is affecting macro and micro swings given that i’m pretty new to all this. But yes price chart is all that matters, for example take EUR/USD on forex, system gave me entry point well in advance of what happened yesterday. Given that i use 20:1 leverage i made a pretty nice chunk of money in just few days and if it goes down i don’t care, i will ride down again and again earn more. Only thing i faltered when i started was risk allocation, currently i still can’t afford to use <2% fund allocation per position but given that i’m just started i am looking forward to forthcoming road ahead.

  9. Comfort can be felt by two ways:

    1 – Comfort by replacing the uncertainty of the future with certain fixed ideas attached to us by hope and wishful thinking

    2 – Comfort by accepting the uncertainty of the future and the willingness to adapt by taking losses and being the safe side by risking very little

    First one is fools gold like a horse blind fold, both are comfortable situations, only the first one leads to disaster and the second is living it real which involves feelings and decision making accordingly.

  10. I believe index graphs are somewhat misleading for the masses. Many stocks that were once part of any index went bankrupt or dropped to a price that eliminated them from the index. As an example there are a number of stocks presently in the Dow Jones that are basically insolvent. At some point they will be replaced so at the end of the day a composite index is really a revolving door that replaces losers moving to the right. In terms of Gold-real money-the Dow is worth about 50% of what the graph says . Ditto for the S&P 500. Just food for thought for those who still buy and hope with no exit plans or money management rules much less a system.

  11. According to the graph, we cannot say that the buy and holders are wrong. If you got in in 1929 and afterward and lived until the age of 80 something to today’s date, then you would have made a pretty good profit.

    Of course a seasoned trader can make more but overall the graph appears to be in an up trend. Therefore, we cannot say that buy and holders are wrong. We can say that we can make more money than them but not that they are wrong. Sadly, after each decline, there was a recovery.

  12. Patrick:

    Questions to answer for yourself: (read: not need to reply to me, this is just for you)

    You say: “Most important thing i had learned in the last year is to read between the lines”

    Question: how do you know when you need to read between the lines? That is, how do you know when “they” aren’t being straight-forward? And, how do you know you are reading between the lines correctly?

    You say: “…you still need to understand the world”…. “It just interests me why and whom is affecting macro and micro swings ….”.

    You do need to understand the nature (volatility, etc.) and characteristics (leverage, trading rules, etc.) of any market you trade. Those are things we need to know. However, you seem as though you believe you “can” understand the world, you believe you can know why and whom is affecting “swings”.

    Question: how do you “know” how others may be “affecting” swings? And, rather than believing you know, why wouldn’t you just adjust your positions by the “swings”? That is, based on the trendiness of the market and its volatility.

    I know only a few things; I can’t read minds, I don’t know anything about tomorrow, today. Instead, our systems are designed around the unknowable nature of the future. Accepting all the many things we cannot know as unknowable allows us to focus on what is now (trend direction, volatility) and those things we do know and can control (our risk, expectation). So we know if we keep doing what we’re doing what the outcome is most likely to be, scientifically, because we’ve tested the parameters over many historical markets and equity curves that do not yet exist. We KNOW the many outcomes and to expect them all. We don’t need to read minds, understand the world, know why or whom is doing what in the market. That is UNKNOWABLE to everyone.

    Final question: if you know you have to read between the lines that implies you may realize what people say and do on may be different. Then how would you predict what they ‘are’ doing if they aren’t telling you the truth? You now…. not only have to call everyone with a trading account… but also predict if they are truthful about their positions. How can you possibly build a trading system around that? What “can” you build a system around? Isn’t there something that will reflect their truths? That is, if capital is loading up on ABC, won’t it be reflected in something?

    Be a FlowMaster…

  13. Yes seems i’m still pretty much opinionated about the markets and would be best to stop following “news”. Certainly attaining Zen stand about markets (and life in general) is the best path someone can take – removing rigidity and adapting fluidity.

  14. Mike will love this. Since 1998 the only thing that has outperformed owning a baseball team is owning Gold. CD’s T-Notes etc outperformed the S&P and DOW according to Esquire Magazine. So bottomline is “if you don’t own a team get one like John Henry did” the famous trendfollowing trader.

  15. so at the end of the day a composite index is really a revolving door that replaces losers

    Sounds a lot like trend following to me. I wonder how many people realize that the only reason the indexes keep going higher is because they are in fact a type of trend following system (an inefficient one though).

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