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Tech stocks - Monday, March 2, 2009

Buy And Hold or Sell And Run?

With the Dow taking a major dive today to the sad song of 299 points, everyone should be taking a long look at their portfolio and the investment strategy they have been employing. “Buy and hold” has been a popular topic on CNBC recently. Since the staff at tech:stocker are fans of this strategy, we decided to take a closer look at this strategy.

When we say we are fans of “buy and hold”, that’s almost an understatement. In the past we’ve applied the strategy unilaterally whether we were buying stocks, bonds, mutual funds, or real estate. We decided upon this strategy after having breakfast with former Vanguard Chairman John Bogle. Over bagels and scrambled eggs Mr. Bogle discussed his inspiration for the index fund and how nobody could consistently beat the market. And even though we were aspiring stock pickers, we had a hard time disagreeing with him.

But with the market continually streaking downward, is buy and hold going to continue creating more ulcers, versus profits, for investors? In the near term, we tend to think so.

Many market experts attribute today’s market collapse to AIG’s (AIG:NYSE) need for $30 billion more in cash from Uncle Sam. We would like to say it’s that simple but it’s not. Anyone who has any type of insight on the insurance giant knew that they would need more money from the U.S. taxpayers eventually.

Some scared investors can point to the company’s reporting a net loss of $61.7 billion or $22.95 per share. Your eyes weren’t deceiving you, a loss of $61.7 billion. This type of loss leaves investors wondering how much capital their favorite bank has invested in commercial backed mortgage securities. And of course many investors panicked today and sold into the bad news instead of waiting for next quarter’s results.

And how investors love buying into a rally, nobody likes being the last one left at a seller’s party. Right now, many individual investors feel like they are the only ones at the dour market party on days like today. Many individuals are disheartened about the future of the market and believe the only option is to liquidate everything and sit on their cash until a new rally party hits Wall St. The problem with this strategy is that nobody is certain when the next rally party will begin.

So getting back to buy and hold versus sell and run. Market days like today, which are not atypical this year, make it easy to recommend a sell and run strategy. After all, who wants to be the loan voice saying stick with the market when it seems like everyone else is selling everything they own. But that wouldn’t be wise right now.

In our humble opinion, what’s holding the market back is a combination of a weak economy and investor uncertainty. Everyone who has cash wants to know what the government is going to do to revive the weak economy aside from the stimulus plan. We don’t see any signs of hope or government intervention in the next several months that will give investors more reasons to sit on the sidelines and wait. Housing sales are going to remain dismal and consumer sales won’t be much better.

But is now the time to hold? We’re sticking by our prediction that the economy will improve by the third quarter. Housing will bottom in late September/beginning of October. And most investors believe the market will rebound before the economy shows signs of recovery. We believe the third quarter of this year will be when the market starts to rebound. But it could be sooner.

So if you haven’t followed our advice and cleaned out the marginal companies in your portfolio, it’s still not too late. Would we recommend liquidating high quality companies right now? Definitely not. Would we recommend selling AIG, Bank of America (BAC:NYSE), and Citigroup (C:NYSE)? Most definitely.

In the short term, the only way to make money is to buy and sell on the waves we’ve been seeing in the market. But this strategy is an awfully risky one and should only be attempted if you need to make money right now. Buy and hold will work in the long term and many investors will profit from it in the long run.