Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Buy and Hold: Cracks in the wall

There is the theory that one can buy stocks or an index, and hold for a long long time, and boom, we have a winner.

This theory has been peddled to unsuspecting investors time and time again, and for a while I believed it myself; fortunately, I have no problem changing my mind when the facts show me the way. About three or four years ago, I switched to the view that a “stop loss” is the single most effective thing one can have on a portfolio; it lets you ride a bull run and stops you out on the way down.

Livemint has an article today about how the cracks in the long-term-buy-and-hold wall are starting to appear:

The premise that in the long-term equities will generate the highest risk-weighted returns is getting challenged with each passing day.

In the US, the S&P 500 total returns index has underperformed long-term treasury bonds for five-year, 10-year and 25-year periods. This is based on Ibbotson data quoted by Peter Bernstein in a recent Financial Times article.

While Indian markets have retained a large part of the gains made in the April 2003 to January 2008 rally, long-term returns have started faltering. In January 2008, the Sensex index on the Bombay Stock Exchange had delivered an average annual return of 22% based on total returns (capital appreciation plus dividend) for a 10-year period. Its average annual 10-year returns have now halved to 11%. Note that early 2008 as well early 2009 didn’t represent an unusually high-low base.

Consider some data. If you invested in the Sensex LOW of 1992, a low of 1945, and held to date, your return would be a compounded 8.93%. [Not counting dividends, which add about 1.5-2%]. This is substantially lower than what most people imagine; I have seen the boom time figures of 25%, but even today, people imagine that over the long term one would easily make 15% on an index. Not quite, as it seems.

And that was investing at the lows of 1992. An investment at the high would yield a measly 3.62%.

Now I’m only taking the Sensex since 92 as I have reliable data for it from the BSE site. It’s entirely likely you will find another 17 year period when this isn’t so, when the returns have been reasonably good. But here’s the clincher: It doesn’t matter, because even one negative data point disproves the theory that long term buy and hold always works.

(Think Individual Stocks are Better? Tata Steel, Hindalco, Tata Motors, Hindustan Unilever etc. have been flat over the last 10 years or so. Arvind Mills, which hit a high of 400 in 1992, trades at around Rs. 10 today, with no splits/bonuses since).

Take the US. It’s at 1996 levels. That’s 12 years of nothingness? The US in 1982 was after 16 years of nothingness (counted from the highs of course), and there was a much longer period after the great depression and just before it, when buying and holding wouldn’t have done much for you.

Now for the reality check: What matters most to you is when YOU need your money. Someone who was 45 in 1992 would have really liked the money today – at about 62. Yet what’s coming out isn’t great – a return of 6% at best on the index. In 1992, one would have gotten 12-14% in Fixed Deposits (and that was the case till nearly 2002).

What if the next 20 years are nothingness? I see that for the US markets, for at least 10…given that most of the buy-and-hold public bought their stuff at around the 10K level on the Dow. It might end up at that for India as well, though I hope not – but one can’t write it off. At the end of 20 years I definitely want my money, compounded at at least 12% – can I get it?

Buy and hold isn’t going to get me there. I don’t know of SIP investing will (it didn’t in Japan). But I know using a 15% stop loss has worked for me. If I were able to define a proper entry point (say entry on a 52 week high) I might be able to back test it as well and see if it worked better on the Index – should think it probably did.

To end, here’s a US report:

Buying 30-year Treasuries is returning more than stocks for the first time since Jimmy Carter was president.

For three decades, owning equities in developed countries earned more than “on-the-run” 30-year government bonds. The advantage reversed after $36 trillion was erased from equity markets since October 2007 amid the first simultaneous recessions in the U.S., Europe and Japan since World War II.

  • Arkad says:



    Gold Exchange Traded Funds are creating HUGH Demand for Millions of Ounces of Physical Gold.

    With US treasury begins to mint money if bail-out, dollar value will deplete significantly.

    So its compounded effect will push gold prices to rocket-surge to new heights. Simple Dollar-Gold value equation.

    What should be our take of ETF’s should we go investing in gold,my friends have asked me about Gold ETF’s investment and i to hear your thoughts.

    Also I welcome our blogger community to come up with suggestions and add value on this.

  • Anonymous says:

    >Can some one do dollar adjusted return of Indian Sensex/Nifty and also one using price index. The results may be shocking.

    Anyway when Nifty goes down to 1250
    in Sep/OCT 09, we will see Sensex at 25 year low (dollar/inflation adjusted). Emerging Markets are lagging the US/Japan/European Markets for the time being.

  • Anonymous says:

    >Gold will not go beyond 1300. Historical relationship between gold to oil has shown a peak of around 35.

    We have seen profit booking as soon as gold touched around 1000 on two occasions.

    Japan minted money during the last decade but did not have any effect to counter the destruction of credit. Those who believe in hyper inflation are on the wrong track.

  • Anonymous says:

    >Dow Jones adjusted for inflation now stands at 1966 levels. (33 years of nothingness)

    SIP, Buy and Hold, 401 Ks, Pension funds are all underwater (most of them followed Newtons Law of Intertial Investing : Fixed allocation and Buy and Hold and rebalancing periodically.

    Those who bought cheap (P/E basis) and sold near high have done quite well. (Tactical asset allocation with a bit of market timing).

    Those who have followed technicals like Elliot, near double tops and bottoms have also done well.

    Those who followed big bulls like Harshad Mehta, Ketan, and P. Chidambaram have and will bite the dust when Nifty will touch it’s low in the Global Meltdown.

    Those who estimated correctly their risk tolerance and kept low exposure to Equities have also done well.

    Only trouble with Deepak’s strategy is : it works well on the up move. But one can get in at false bottoms and get burned 15% at a time. (like Buffet did in Sep. 08)

  • Anonymous says:

    >Are we missing the biggest picture of all on this subject, namely the Baby Boomers of US and Europe who had built up the so called Equity Cult since early 80’s. Now with the winding down, will Equity as a class have a future compared to Safe Bonds (like Govt. Debt)? Already the returns of US 10 Year Treasuries have outperformed Stock Indices in US since late 60’s. Huge financial deglobalisation is taking place. Even London lost 1 Trillion Dollars in last one year. Forget Emerging Markets. Money going back to home countries like US/Japan/Germany/China/Gulf. Equities are dead for a long time to come.

  • chimak10 says:

    >hey deepak

    i would like to know how did you fared when you switched from investing in stocks to trading in stocks?

    i mean if anyone trades or invest in raging bull market that person can make money.

    i mean did u make good amount of money trading since jan 2008.

    i am not making any arguments just curious cause i don’t know any professional trader.

  • Deepak Shenoy says:

    >Chimak: I have made a decent amount trading short. It’s the investments that have killed me (primarily my ELSS stuff and the only leveraged long I still regret)

  • Anonymous says:

    >i agree. buy xyz stock from long term point of view is the patent line of the "analysts" and "anchors" on cnbc tv18 (or for tht matter ny biz news channel. i feel the general public wud have been better off without these biz news channels peddling the 'long term" blah.
    nyways, equities as an asset class will surely be reviewed and derated by the truly institutional investors viz pension funds, endowment funds.
    C'mon negligible returns with so much volatility. who would want such an investment? Spare a thought to the investor who bought the long term story at the height of the bull market. rem infy @ 17000 ? anyone?
    so will the above investor break in the black nytime soon ? i think not. ever? well one can just hope.

    ps: warren buffet was urging fellow americans to 'BUY' equities in octber 2008. guess what. s&p 500 has tanked 27% since october.warren says he buys equities 'forever'. there is a huge survivorship bias out there. think about all those not so famous and deep pocket investors who bought stocks imitating warren. think about them. must have lost more than just their shirts. warren survived to tell the story. what about those who didnt.

  • viv says:

    >I tried to see if I could get sensex PE data but could not get anywhere on web immediately.

    So going by what I have remember from financial news, sensex hit PE of 60 in 1992 bull market at high of 4546, the bear market low was in 1993 at about 1850. The PE at 1993 low would be about 25!

    PE of 25 is hardly a value investing level. If someone got 8.9% return from there to now when sensex PE is around 9, that’s still fabulous return!

  • Deepak Shenoy says:

    >Viv: 1992, earnings calculations were probably based on different fundas compared to now, and regulation was very different. (The Trailing Twelve Month funda kicked in sometime in the middle)

    Sensex P/E today is 12.3, not 9. You can get the data in the “archives” section of the BSE India site.

    We don’t even know what the PE then would be if we had the same rules as today, so I would hesitate to compare P/E.

  • K says:

    >We can see same kind of stories(otherway) during bull buy and hold strategy is good for longterm investing.It is just a matter of time when we are measuring the returns… bull or bear.

  • Suresh says:


    While I partially agree with your article doesn’t asset allocation and rebalancing exist to make sure you are not missing returns in equities vs treasuries or bond markets.

    Most of my investments are in US market following the strategic asset allocation but I was wondering if the same rules apply to Indian markets.

    Also one more question. Does your short only (or long only) returns justify the time you spend on the same. just curios.


  • Deepak Shenoy says:

    >Suresh: Is there any research that talks about asset allocation being superior or worse than buy n hold etc?

    yes, and Returns do justify the time, in more ways than one – the learning on one loss gives you the ability to tweak your ways ahead, you work with money management and position sizing better over time, you back test theories, you work with data – it’s all worth it because it provides a substantially better return than being purely passive. But that’s for me.