Why not just Buy and Hold?

Danish Kapur gets it right, when he asks:
“I have one question. You said that your annual return last year was 80%. Market as a whole returned more than 100%. So, would not it had been better if one had invested in market and left with some tracking here and there rather than spending day and night and still underperforming market as whole. I know one can argue against me giving example of 2007 when markets fell equally but let us take average of last 10 years returns and that will give better picture of one’s performance rather than one year.”

My Notes:

Most traders will underperform the markets when there is a secular bull run going on. I know this sounds surprising, but that’s my perception. Now, markets also go through significant declines. These periods will allow the trader to gain more than the market, therefore giving a return that is likely to be superior to the Market’s performance. My own experience is also what I have described here.

Why not just buy and hold? We cannot do so since we do not know in advance the periods from which buy and hold will outperform trading. But, sooner or later secular uptrends are detected and our investments are increased (for the buy and hold gains) from debt to equity. Trading funds are not touched.

Many readers should recall earlier posts where I have written about realistic expectations. If we do not expect too much from trading, then trading is likely to reward us more than a simple buy and hold strategy. If we want 100% returns every month, then we can quickly see our money vanish.

If we could detect the beginning of a bull market, then we can switch to a long only trading strategy. But, even this strategy will under-perform a strongly up-trending market / stock. The reason lies in exits. Often, such systems will be flat while prices suddenly make big, unexpected gains.