I recently went through some old course notes from the early 2000s. One focused on investing and trading, in particular on the challenging aspect of trading vs buying and holding.
The idea was simple. An asset would start the game at 100 and end at 200. There would be 250 bars of information between these two price points, and the challenge was to maximise return over the period by buying and selling. There was one tweak to make it closer to real life: each transaction reduced profit by half a percent to replicate fees. Other than that, whoever had the most at the end won.
We all went crazy over the allocated time period, trading up a storm. And here’s the wild thing — at the end of the period, nobody’s balance was above 200. Further, if my memory is correct, about half lost money. Even more telling, nobody doubled their money, which is what the buy-and-hold strategy would have achieved.
The lesson was manifold.
First, trading is hard. Second, even knowing the future did not mean one would make money. The third and perhaps most important lesson was that a simple buy-and-hold strategy likely wins more often than not over time.
The problem is that there is a lot of noise over that time. We hunt out that noise and mindlessly respond to it. In other words, we actively seek to reduce our returns, instead of just doing nothing.
When I was working as a stockbroker, I chatted with a client who logged into his account once a year during the second week of January. He’d log in and invest the dividends he’d earned over the year. He didn’t rebalance, though he added money to laggers and not winners. He also never checked on share prices during the year and never read results or news about the market.
His logic was simple. Buy quality and hold it. Anything else would risk selling quality because of a period of poor performance (either profits or share price).
Thinking about my own investing, my losers are less about buying poor-quality stocks, though I have done that often enough. I tend to lose money when I react to short-term noise — a poor set of results or any exciting opportunity that needs cash and I sell something quickly.
If I stick to my simple investment thesis, I do great. I buy boring quality, write down the three key points I like and dislike about that stock and hold until the thesis is irrevocably broken.
This has kept me invested during all sorts of global meltdowns, consumer crises, pandemics and more. In short, buy quality, ignore noise and profit over time.