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Why Some Buy-and-Hold Investors Fail

NEW YORK ( TheStreet) -- Buy-and-hold investing may sound simple enough, but it actually ranks among the toughest ways to invest because it requires immense discipline and considerable patience.

However, this strategy should not be confused with what we like to call "set it and forget it" investing. True buy-and-hold investing requires developing an investment thesis, identifying hard catalysts that you can define and measure, and exercising extensive and continuous due diligence. More common forms of buy-and-hold investing suggest investors buy a name and put their heads in the sand for a number of years expecting their stock to rise over time with the market. We do not condone that kind of reckless investing. Those who are inattentive or disregard bad news under the guise of being a long-term investor give buy-and-hold strategies a bad name.

Successful investments often come when an individual works hard and develops an edge on a stock. Whether he has a unique thesis, or is simply ahead of the crowd, a successful investor relies on discovering something that others have not yet uncovered. The bottom line: We want to profit by selling our stock at a later point for a higher price to someone who did not share our early insight. Every individual has two advantages that Wall Street investment professionals do not: time and patience. Because portfolio managers get paid based on their performance, they do not have the luxury of waiting for stories to unfold. They would rather pay up once the stock has begun to move or after the risk has been neutralized by fundamental change.

Investors may want a sure thing, but (legal) investments without risk just don't exist. We are comfortable taking on the risk of waiting, as risk vs. reward is a fundamental tenet of investing, and we believe we will be well rewarded.

Wall Street Has a Short-Term View

Wall Street tends to act first and think later and emotional reactions to stock news and events are commonplace. Money managers want to make sure they have the sexiest stock in their portfolio, so they can write about it in their quarterly report to investors. Sometimes Wall Street can't see the forest through the trees, and this creates opportunity for investors -- though it takes courage and patience.

In this space we will dig for ideas, conduct extensive due diligence, develop our investment theses and outline meaningful catalysts that could move our targeted stocks higher. Using a buy-and-hold approach will keep us from getting caught up in near-term sentiment shifts and allows us to take advantage of near-term mispricing on stocks that we can hold for the long term. Not focusing on short-term trading will help us discover uncovered gems with significant upside.

Near-term events can impact our long-term theses and may require immediate action. Long term aptly describes our investment horizon, but in no way describes our patience. Long-term investing refers to our thesis, but not to the length of our investment, as things change and ignoring those changes would be ruinous. We are fact based. Long-term investing is anything but lazy investing and is not passive by nature.

How to Find Long-Term Investment Ideas

We will look to buy strong companies that have leadership market positions, top quality management teams, and definable catalysts. We will look to invest in names that Wall Street has lost patience with. We have seen companies punished when they decide to invest in their businesses. But by diminishing their near-term upside surprise potential, they can increase their long-term opportunities. Money managers flee these stocks because they see their performance fees evaporating in the short term. Subsequently, the stock price drops and we will be there to buy fundamentally strong companies that decided to invest in their future. We believe in those management teams, as they have identified strong future opportunities for their companies and are taking action to properly position themselves.

We have seen stocks punished when they shift from recognizing revenues up front to recognizing revenues on a subscription basis over time. These companies are essentially shifting to models that offer great visibility and less volatility. However, in the near term, a gap of lethargic growth is created, and most investors who can't stomach the near-term pause will flee. We will buy high quality companies that may have stumbled in the near term but clearly have secular opportunities ahead of them. Finally, we will look for companies that are suffering due to macroeconomic concerns or weights, but are leaders of industries and will see greater fortunes once the aforementioned pressures evaporate.

There are limitless opportunities for buy-and-hold strategies. We are looking forward to the luxury of enduring near-term pain with the confidence of long-term fundamental strength.

In keeping with TSC's editorial policy, Bryan Ashenberg doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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