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Risks of Buy and Hold -- By: Bill Kraft
Copyright 2009, Makin' Hay, Inc., All Rights Reserved
Bill Kraft
Editor |
In the article last weekend, I discussed the concept of trying to
catch falling knives and, quite predictably, I received some comments
from readers justifying their own actions in buying falling stocks.
Contributor set forth a very thoughtful plan through which he buys
falling stocks with which he has had success, but was careful to note
that the strategy is very risky. I agree completely and commend him for
the construction and use of his plan that is set out in last week's
blog. Another commentator defended his practice of buying GE as it was
falling on the theory that it is a great company. I have a little more
trouble with that one and liken it to a fellow who was upset with me a
couple of years ago when I criticized elements of buy and hold because
he and his family had been hold what he referred to as "that old doggie"
Citigroup (C) since it was only $14. Citigroup is trading under $3 as I
write this article.
First, I want to say that I have no problem with people trading
GE. It is, indeed, a great company, and even in very significant
downtrends such as GE has experienced in its fall from about $37.50 last
year to it's current level under $12, there have been several trading
opportunities both to the upside and the downside. The key, in my view,
is to have an exit strategy in place since we can always be wrong on
direction. We also need to be mindful that GE, though a great company,
has not been a great stock over the last 9 years. It traded near $60 in
2000 and if I had bought it then and held it until now, I don't think I
would be very happy. It is not alone. Other great companies like Coca
Cola (KO) have seen significant drops over that time as well. If a buy
and hold advocate just bought the Dow near the high in 2000 he would be
down approximately 3400 points as I write today.
The point I am trying to make is that a buy and hold approach with
no exit strategy is extremely risky. To start, buying a stock is one of
the riskiest things we can do in the market because, without stops or
protective puts or some hedge, the risk is the whole investment. Great
companies have failed and disappeared. There was a time when investors
would have laughed at the suggestion that the great Pennsylvania
Railroad could ever fail, but I watched as my own father, then a Federal
District Court Judge, signed Order No. 1 in the Pennsylvania Railroad
bankruptcy proceeding. Bankruptcy of General Motors was unthinkable not
so long ago but we just saw it happen. The list of once great companies
that failed is long, indeed. Those who were buyers and holders of those
companies doubtlessly suffered. According to "Yahoo answers" American
companies have been going into bankruptcy at a rate of 500 a week!
Obviously most of those are not publicly traded, but publicly traded
companies like GM definitely are to the great pain of shareholders.
I have little doubt that many will remain unconvinced, but buy and
forget or buy and hold with no exit strategy is fraught with great
danger. What if we bought at a top and have need for the money when
there is a significant decline such as the one we have recently been
witnessing or the one following the 2000 high? My suggestion to the buy
and hold investor is to be aware that there is risk, sometimes enormous
risk, and ask yourself the question: Hold until when? Why would you not
want to have an exit strategy? If you exit and then the stock turns back
up, you can always buy it again. Sure you may have to pay a capital
gains tax (currently at a low rate) on the gain, but isn't it better to
do that than to see your investment go down the tubes completely or
suffer a large loss?
Good Trading!
Bill Kraft
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General Electric Co. (GE)
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Here's a look at a trade Bill is currently working on:
St. Mary Land & Exploration Co. (SM)
SM closed around the neckline or a reverse head and
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Bill Kraft
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Trend Trader -- by Bill Kraft
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Here's a look at a trade Bill is currently working on:
Cooper Industries Ltd. (CBE)
CBE has formed a double bottom support and is now moving up
toward a resistance with DMI and MACD positive along with a moving
average crossover. It began a trend up following the March lows and I
have it on the screen if it can break the nearby resistance around $32.80.
Good Trading!
Bill Kraft
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$10 Trader -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.
Here's a look at a trade Bill is currently working on:
Stillwater Mining Co. (SWC)
This stock has shown some recent strength and gapped up and
stayed up Friday on relatively heavy volume. There is some resistance
before it gets to the $6.50 mark, but a move beyond the resistance after
a possible test could signal a potential entry.
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Bill Kraft
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