A community member named “TinLizzie” recently posted a helpful comment to my Google Knol on “Why Buy-and-Hold Investing Can Never Work,” and I responded with a post that explored some aspects of the question that I have not focused on before.
Juicy Excerpt: It is foolish not to take price into consideration. It never works. It’s not even possible for the rational human mind to imagine circumstances in which it ever could work. But yet we return to this “idea” again and again. There must be something that gives this idea great appeal. What is it?
The key to understanding this is appreciating that WE are the market. When we say that the market is efficient, we are saying that WE are efficient. When we say that the market is rational, we are saying that WE are rational. When we say that the market is perfect, we are saying that WE are perfect. Believing in Buy-and-Hold Investing is an exercise in flattery.
Have you ever met a person who was full of himself, who was so arrogant that he or she could not admit being wrong about anything? That’s what the investing public becomes as a collective entity when it becomes entranced with the Buy-and-Hold idea. One of the slogans that Buy-and-Holders love is “You can’t beat the market!” Again, WE are the market. What they are saying is — You can’t beat us — we are just so amazingly wonderful that nothing could ever be better!
What we need when we get caught up in the Buy-and-Hold “logic” is a dose of humility. That’s why God invented stock crashes. Once Buy-and-Hold becomes popular enough, there is only one way to bring it to can end — through a price crash that destroys so much wealth that it brings some humility to the arrogant proponents of the idea that this particular day’s investors have become so perfect that they can never be “beat.”