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Monday, November 13, 2006

Is Buy and Hold strategy ideal for all types of stocks?

Most of the financial magazines, books and newspapers I have read emphasize the importance of buy and hold strategy when it comes to owning stocks and mutual funds. What is interesting is that when I browse through the prospectuses of many mutual funds, I find that many fund managers recommend that their clients not to lose faith and continue to invest in their funds even though these managers themselves rapidly buy and sell their fund holdings, and their funds have a high turnover ratio.

Based on my experience, what I have found is that such a strategy depends on the type of stocks or mutual funds you own. I believe that the buy and hold strategy should not be applied blindly in all cases. While the strategy may be good to follow in cases of stocks of large firms with stable earnings, it should be followed with caution in case of small firms, technology firms and firms with volatile earnings. In my view, in case of the latter firms, due to the rapid changes in technology and competitive environments, mergers and acquisitions, and other factors, buy and hold strategy may result in substantial losses. For example, firms such as Cray, Wang, Silicon Graphics etc were once dominant companies in the technology sectors before they lost out to other firms due to the changes in the technology, emergence of other firms and other factors. A buy and hold strategy in case of such firms would have seen most shareholders lose a substantial part of their capital. I learned this fact the hard way when I invested in Siebel whose stock peaked in early 2000. Siebel was the leader in the Customer Relationship Management (CRM) industry and had grown rapidly as the major companies bought its CRM software. However, because of the saturation in the CRM industry, changes in the market conditions, technology and competition from companies such as SalesForce.com, SAP and others, Siebel's stock dropped all the way from $200+ to in 2005 to around $7-$9 range in 2005 before it was bought out by Oracle in 2005.

So these days, I try to follow technology stocks as much as possible in case I invest in them rather than just buying them for long term and forgetting about them. In addition, one of the things I try to do is to take out my original capital if the stock has risen substantially, and if I still want to own shares in that company. This way, I am playing only with the appreciated value of the stock, and even if the stock later tanks, at least the money I had invested is not lost.

Labels: investing; invest

posted by Ruby @ 7:46 AM

1 Comments:

At 12:37 PM, Anonymous said…

Totally agree with what you mentioned. Buy and hold is not always the best strategy.

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