Buy-and-hold investors, once considered the virtuous, are now the ridiculed.
Read publications from
The New York Times
, talk to a financial expert type, or just look at your own portfolio and self reflect: Buy-and-holders are being branded as foolish at best and greedy at worst.
What kind of knucklehead would not have known better than to get out of tech when the going was good? What kind of pig would hunger for greater gains than be thankful for what the gods had given? What kind of lout, feeling flush, would assume more debt than take profits to pay down the loans he owed?
Suddenly, the good-guy investing philosophy has become the bane of evil.
If you are one of the ones caught in the buy-and-hold "trap" and are sitting with the same number of shares but far less wealth, I urge you: Cut yourself some slack. Buy and hold is a mentality deeply ingrained not only in the investing community but through the broader American psyche. Investors who've adhered to it aren't necessarily greedy, stupid or even wrong. They may just be caught up, understandably, in the forces of our culture, ranging from the Wall Street establishment to
capital gains scheme.
Perhaps the biggest propagators of the buy-and-hold message are the folks with the most self-interest in promoting it: the influential mutual fund industry. Since the overwhelming majority of fund families get paid based on the amount of assets they manage rather than their performance, their goal is to hang on to your money.
You buy, they hold.
Yet, most managers do not ply buy and hold as they manage investors' funds; they trade actively. As
writer Joe Nocera pointed out in a November 1997 column, managers want investors to think "long term," essentially suspending scrutiny. But all sorts of industry incentives -- from intense daily media coverage to bonus structures -- push them to manage for that year's fund derby, or even that quarter's. Those details are the last thing broadcast to potential investors.
Not all sources of buy-and-hold reverence are as Machiavellian as the mutual funds. Buy and hold connotes certain human qualities considered admirable and worthy, while selling, especially short term, evokes unpalatable traits. "There's always a bias against speculating," says Jeffrey Bronchick, chief investment officer at L.A. money management firm
Reed, Conner & Birdwell
. "It's not the Judeo-Christian work ethic. You're sitting in front of a screen pushing numbers instead of pushing a tractor."
These puritan ideas translate into the kind of "buy the company not the stock" thinking that has helped make Warren Buffett the American icon of investing. The man is the ultimate adherent of buy and hold, lauding the holding period "forever." But Buffett's grip on both the media and investors -- who flock to his annual Omaha shareholders meeting and attempt to master his methods -- arises from more than just his actual success. It's
he's achieved it. As biographer Roger Lowenstein wrote in
Buffett, The Making of An American Capitalist
, "Buffett's genius was largely a genius of character of patience, discipline, and rationality."
Who wouldn't want to think of themselves as possessing those traits? Patience connotes the ability to hold course while a company -- and its stock -- suffer a downturn. Discipline connotes a willingness to stick with an investment strategy even when it's producing lame results. Rationality connotes a level-headedness that prompts one to stay the course while others "panic" sell.
The patient, disciplined, rational investor wouldn't "bail," just because of some "blip" in the
. She'd likely practice another virtue: loyalty. The loyal investor sticks by a company through good times and bad, where the fickle stock trader takes his paper profits and runs without a care for a company's long-term prospects.
The injection of these moral notions of good and evil into the actually mundane practice of investing is not just an inchoate aura out there in minds and the media. It's deeply entrenched in the U.S. tax code, which directly influences investors' decisions. Capital gains rules benefit investors who hold stock for at least a year and punish those who sell sooner. Thanks to a provision that took effect this year, tax treatment is now even more favorable for five-year holders. The ultimate buy-and-hold bonanza: Hold until you die, then recipients of your stock only pay tax on the price difference from that sad day to their sale day.
There's not much of an economic argument animating these tax rules, just the same buy-and-hold worship. "Congress and a lot of other people think there's something nobler about holding an asset for six years instead of holding an asset for nine months and selling proceeds," says Stanford tax law professor Joseph Bankman. "We encourage people to hold property long after they'd wish to sell it." Bankman doesn't agree with the rules, but says that's the American way. "If you want to get something get passed in Congress . . . trader is kind of a bad word," Bankman says. "Nobody's interested. If you say it will help long-term investors, everyone's interested."
Which would you rather be? The kind of person Congress wants to help? The kind of person Warren Buffett would approve of? A patient, loyal, disciplined person? Or some greedy fly-by-night who plays the market to get rich quick? The comparison might not make investors feel any better about their flailing portfolios, but it might help explain how they got to that point.