Buy and Hold is a bad strategy
This will be an unpopular statement. Buy and hold is a bad strategy for creating wealth and generating income. It may have worked for Warren Buffet, but it does not work for most people. Here is why…
Most people have situations when they need to use their saved-up money - maybe an education, down payment on house, some emergency need, retirement, etc. The stock market does not cater to those needs. For example …
The person who rode the stock market the last several years and planned to retire in Dec 2022 has lost between 15-60% of their holdings value this year. How is that?
Well, the most attractive stocks are Apple, Amazon, Tesla and Facebook (Meta). These stocks had gained a whopping average of 800% in the 5 years through 2021. But….
In 2022 they have lost an average of -45% from their top. I know people who have put off retirement because of that. Others have lost their down payment to buy a house. Clearly, buy and hold has not worked for them.
And, now when they need the money, they are staring at a loss of almost half of what they had saved up. So, if buy and hold in not the strategy, what should be the strategy?
One way to avoid these steep downfalls is to get out of the stock markets during these painful situations. Go back to cash and stay there until the markets turn back on. Ok, sounds good but that means timing the market. How do we time the markets?
To that I would say learn basic technical analysis. Fundamentals and valuations get affected by a myriad of external unknowable factors. But technical analysis tells you the sentiment and the probabilities prevalent in the markets.
One specific simple technical analysis is trend following using moving averages. This is one of the most basic strategies yet has a strong potential to save money.
Simple trend following does not need any quant calculations nor does it need any mathematical calculations. It is charting a stock price along with its timed moving average. Here is one way …
Go to yahoo finance, type in TSLA in the search box, click the chart to go to the full-page chart, select YTD as time period. Now we have the basic chart. Add the moving average by ….
Click on “Indicators” and selecting moving average. The default will be 50 days moving average. Select that and immediately you will see another line going around the price which is the 50-day moving average of the price. Now …
Look at the last time the price crossed below the 50-day moving average. It was between Sep 22 and Sep 23 with the TSLA price between 275-288. Assume worst case you sold it at 275, you would have saved a loss of 102 or avoided a loss of -37%. In other words, …
You would have had another -37% loss on your capital if you did not sell Sep 22-23. As we can see, there is no quant calculations or even any math involved here. Just simple observation of the price trend and taking protective action.
This is the simplest use of moving average against price to make a sell decision. I will write about more such strategies to manage investments more efficiently and in a risk mitigated way. Follow along for more on those.