Thoughts on Economics and Investment, Part 2: Challenging the Buy and Hold Strategy
Underlying premise of “Buy and Hold” strategy
One of the most tried and true maxims of investing is: buy and hold. The idea is that, in the past, those stocks that have been bought and held for the long term have given solid returns. The underlying premise is that the past strategies will continue to work in the future. I want to challenge this underlying premise. The buy and hold strategy was successful during the 20th century because the 20th century saw unprecedented economic growth. The buy and hold strategy assumes that the 21st century will have similar economic growth to the 2oth century. It is dangerous to assume that the 21st century will have this growth.
Consider the following developments from the 20th century
-Invention of the automobile
-Invention of the airplane
-Advent of the assembly line
-Abundance of cheap oil
-Abundance of cheap food
-Not to mention: radio, television, atomic bomb, helicopter, CDs, printers, DVDs, the internet, personal computers, and Google.
Economies (micro or macro) cannot grow forever, there are limits of capital and production. The abundance of cheap energy and cheap food, combined with new technologies that made the world substantially smaller, made the 20th centuries’ economic growth unprecedented in world history. I am skeptical to think that the 21st century can maintain this momentum and am inclined to think we will butt up against an economic asymptote.
Caveats for the 21st century
Energy is no longer cheap. Paradigm shifts in current energy sources will likely be required to solve the problem of Peak Oil. Food is no longer cheap. The Western world has been descending into a sensate abyss of titillation, amusement, general thoughtlessness, and continues to lean further towards socialism. In my view, India, China, and Russia are the great hope for serious economic growth in the 21st century. However, the high cost of commodities and energy will likely curb growth. Further, the globalized world still relies (for the time being) uncomfortably on the crippled U.S. economy. One must worry when the most capitalistic nation in the world is a communist country.
In my view, the “buy and hold” strategy is not as fiscally safe as it once was and I plan to not invest in this manner.
Up next we will take a look at diversification.
Written by Michael Graham
January 5, 2010 at 9:20 pm
Subscribe to comments with RSS.