My stocks portfolio (as at 30 Oct 2009) - Does buy-and-hold strategy works?

Does buy-and-hold strategy works?

Warren Buffett has an investment quote, "We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely." Different investors have different investment philosophy. Not all investment philosophies are alike. Some thrive on constant trading while others like me subscribe to a buy-and-hold strategy. I respect different investment philosophies as there are successful practitioners
living out different individual investment philosophies making good returns on their investments.

As a focused value investor, I look out for sound fundamentals of companies to invest in. I also look at valuation of the company stock, to make my investment as far as possible at undervalued prices of a company's stock. I also adopt a buy-and-hold strategy to make the most out of my investment from the continued good growth and economics of a business. As long as a business is still worth investing in, I will remain invested in it to allow the long term economics of the business to increase the value of my investment over time.

Of course, a buy-and-hold investing approach does not mean marrying a stock though it seem to suggest from the persistence to hold onto a stock even through market fluctuations. The correct view to a buy-and-hold approach is that an investor remains invested in a business that is still performing in terms of business economics. Only when the business has deteroriated permanently in business fundamentals or the stock price of the business has been grossly overvalued so that the business's total projected cashflows over it's lifespan cannot justify for the high stock price being traded will an investor divest out of the business. A business will have it's business cycle (growth phase, maturation phase and declining phase). No business can remain forever. So, a buy-and-hold strategy looks at remaining invested in a business that is perceived to be able to generate a consistent successful excellent business economics over it's entire lifespan (the longer the business can continually perform generating good returns for it's shareholders, the better).

Thus, buy-and-hold does not mean being a stubborn mule bitting and holding onto a carrot and will not let go no matter what. If the carrot is spoilt or lost it's taste, it is prudent to part ways with it immediately and look for better carrots to bite. However, when the mule has found an excellent carrot, it will bite and chew and continue chewing slowly indulging in it's excellent taste for while the carrot can last until the last chew.

My portfolio results stem from a buy-and-hold approach

I have not done any trades during the month of October. Since there is no acceptable investment opportunity and ideas this month, I remain inactive. Adopting Buffett's quote above, I will wait patiently for investment opportunity. If nothing great appears on my radar screen, inactivity strikes one as intelligent. Anyway, I don't get paid for activity unless it is necessary to carry out a good investment idea. Only the brokerage firm gets paid for my activity.

My portfolio went through a mini-roller-coaster ride for this month. However, things have stabilised at least for the moment. As to the short-term forecast of the stock market movement ahead, I have no desire and interest to know. As long as my invested companies continue to do well in business economics, I remain invested in them. Market fluctuations are of no interest to me. Stock price fluctuations only allow me to decide when an investment opportunity has arrived or not. Stock price movements being characterised as "Mr Market" is my friend. I will entertain "Mr Market" and make friend with him only when he offers me an attractive price for an investment opportunity. Otherwise, I will only smile at him at best and say "call me again next time" when you have a better deal for me.

I did not receive any dividends this month from all my stocks holdings and since I did not make any trades, the realised gains remain stagnant at $8826.18. My total transaction costs remain the same as well (thankfully without any trades made). My portfolio has seen improvement in the unrealised gains allowing my net total gain (%) to rise to 47.53% on my portfolio cost (compared to last month's net total gain of 40.15%). So, does buy-and-hold approach works (considering I had bought and held onto most of the stocks in my portfolio for around a year already)? I think it is still too early to tell. I am still investing and researching based on my current portfolio on the possible merits of such a buy-and-hold strategy. I will continue to learn how to live out a focused value investing philosophy and see if it really works in practice. Let the research continue on........

Additional research information on my portfolio for this year

I only started to document my portfolio results from January this year. However, it provided somewhat enough information into the movement of the stocks market from the bear period a year ago through the sharp rally from early March until now. I view the stocks market ahead with anticipation. It is really fascinating to watch the everchanging dynamics of the market based on the combined psychology of all market players since I started investing. It is no wonder so much work and research has been done in the area of behavioural finance to document the thinking and psychology of market players. The human mind is really fascinating to examine when making investment decisions be it rational or irrational ones.

I shall present the following charts that document my progress in investment over this year.

The market value of my portfolio was below my cost of portfolio from January to April. This was due to the full sharp decline of the bear market felt from October last year to March this year. By holding onto my stocks and averaging down, I managed to have a low average price for most of my stocks (though my low average price for most of my stocks is still nothing compared to an investor who has entered during March this year). Well, those that can time the market bottom efficiently has already got their deserved rewards for their good judgment (based on hindsight) having been realised by the sharp rally following March. As for me, I may not have invested a substantially large part of my funds during March, but I certainly have caught a fair bit of investments from October last year to March this year adopting a value investing philosophy. The market value of my portfolio has exceeded my cost of portfolio from April until now thanks to the sharp rally and a buy-and-hold approach. Moving ahead, I do not know what will happen to the stock market. But, I will certainly still buy-and-hold cautiously, always looking out further for good investment opportunities along the way.

My portfolio was still making a net total loss from January to April. After April, since the market value of my portfolio has risen above my cost of portfolio, my portfolio has seen net total gains. I will continue to monitor my investments and try my best to live out a focused value investing philosophy. I am more interested in longer term returns than short term returns, as short-term performance may not mean anything at all. A good investor is one that can invest at high compounded annual rate of returns over decades.

My unrealised gains has increased sharply since April due to the sharp rally until now. My realised gains from a limited amount of trading (full divestment of Jaya Holdings and partial divestment of CapitaCommercial Trust) and dividends received has also increased from January until now. I am looking at further growing my realised gains not from trading of stocks but from increasing my cost of portfolio by regular reinvestment so as to increase the amount of dividends I will collect from an enlarged cost of portfolio. By reinvesting through the future years, I hope to enlarge my cost of portfolio and allow compounding to continue it's work. Sir Albert Einstein once quoted that one greatest discovery to humanity is the effect of compounding. When compounding works in finance and investment, it is truly amazing how a small capital base given sufficient time by compounding can magnify it's value by many folds.

Discussion points:- Is buy-and-hold a dead end strategy? I may not think so. As long as it is used properly, buy-and-hold approach may even be better than an active trading strategy considering the amount of transaction costs that are bore by an active trading strategy that eats into returns.

Compounding is an amazing mathematical effect. An investor that regularly reinvest will allow compounding to exert it's effect on his investment to increase his original investment many folds over a period of time. The higher the compounded annual rate of returns, the higher will an investment grow in value over time. Of course, getting consistent high compounded annual rate of returns is by no means easy. It requires continuous effort by the investor to invest prudently and wisely to acheive such high compounded annual rate of returns over a long period.

I shall present more discussions on the companies in my portfolio in future posts. I wish all readers the best in your investment journey.