Buy and hold vs. active portfolio management

[systematic]

Interesting discussion.
Don't derail it please (anyone) because there are some interesting points of view.

tech/a - you have longer term investments, like houses and business(es). But you don't value them every day/week/whatever by what someone else would buy them for, do you? You have a plan to grow their value at a good rate, over time, right? If some psycho came in and offered you half of what you thought a house / business was worth...you wouldn't say, 'oh no! The market has fallen, I better sell' - I know you wouldn't. You'd think, 'what an idiot, low ball offer...this is worth way more than that'. Similarly, if someone came in and offered you 4x what you think it's worth, you might say, 'screw it' to your original plans, and just sell to the idiot.

I just think that's more how VC is talking about investing (but using your own analogies)...does that clear it up a little? VC is looking at what he thinks the house or business is worth, but is also willing (I assume) to sell if the psycho is willing to pay way over what he thinks that business is worth. Similarly, he ignores the idiot who makes the half-price, low ball offer.

I'm sorry if any of that is unhelpful, as I have enjoyed this thread.

-----------

Now, to a thought that has been raised re: 'mechanical' vs. fundamental business analysis / valuation style of investing. My opinion only (and I've shared this before):

As a systematic trader / investor (I don't care for the terms at all)...why do I actually trade this way? I've said it before, because I don't believe I'm good enough. Good enough for what? Good enough to be the person who will beat the model (note, I said the model, not the market).

I do believe (and I said this back in the 'craft' days)...that the person who can really, really pull it off...(business valuation)...that person will cream not just the market, but any systematic model I have to offer. But, I can't risk my retirement fund, betting on ME being THAT person.

I don't believe many can. I don't believe hardly anyone can. Heck, despite what impression newbies on forums get...most investors, traders or whatever...are not beating the market at all. Let alone being good enough to do it on business evaluation.

The real opportunity, in my opinion, is someone who can spot a business that should be worth $600M one day, and is currently being sold off by the idiot at $200M or whatever. The person who can do that as a thing, and not just a one off, is a very rare gem.

A (systematic) competitor to that idea might be someone who can run quant models but way out of the ordinary. Think, Medallion fund, with 39%pa over 3 decades. If you can do that, you're a rare gem. Those models are not, 'buy a 50 day breakout on a low P/E stock'(!)

I class someone who is successfully doing Buffett style valuation (or Lynch style - who seemed to show true, unexplainable alpha...or Simons statistical genius...or whatever) as better.

People using systematic models (whatever the data inputs...price, news, financial data...)...are doing so PRECISELY because they want to achieve the results that a (well developed) model is pointing towards. Which leans them towards beating the market, but at the same time are ruling themselves out of the far, far right tail.


Anyone using a discretionary approach (whether charts, hyper-quant, or business valuation)...AND...is world-class at doing that...will (and should, as a reward for effort) beat the model traders / investors.
BUT. BUT. Not one in a (hundred? thousand?) who attempt any of the above...will do so.
My message to the newer ones, searching for their own style is always...'do you want to bet that you'll be that person? Go for it'

Heck, it's hard enough for the average investor to even be a systematic model investor, let alone be a world class discretionary trader, business analyst or statistical genius.

 

[Value Hunter]

Tech/a that chart you posted of Credit Corp Group (ASX Code: CCP) is actually my largest holding and has been for years. I held it without selling a single share for many years and I have done well from it long-term despite the big drop and subsequent recovery. I added to my position at the $12.50 capital raising price, (but didn't manage to buy shares at the bottom below $7 due to lack of available funds). What you are saying sounds good in theory but did you actually trade it that way?

 

[So_Cynical]

My thinking on buy and hold has gone through many changes over the years, looking at an old portfolio snapshot from 5 years ago i noticed that i had sold out of a few stocks that had done really really well and only a few that had gone to zero, most like 80% or so had gone sideways and up a little.

Going over my portfolio history after 15 years in the market, if i had simply bought and held everything i would be massively ahead, as you can only lose 100% of anything but the upside is unlimited, buy - hold - forget, seems to be the go.

The breakdown, 95 stocks in total.

• 5 x 100% loss
• 6 x more than 50% down
• 9 x more than 1 but less than 50% down
• 11 x taken over at profit
• 35 x less than 50% in profit
• 24 x more than 50% in profit
• 3 x up over 100%
• 4 x up over 400%
• 1 x up over 1000%
• 1 x up over 5000%
• 1 x up over 7000%

 

[tech/a]

Home with a huge dose of the flu!

tech/a - you have longer term investments, like houses and business(es). But you don't value them every day/week/whatever by what someone else would buy them for, do you? You have a plan to grow their value at a good rate, over time, right? If some psycho came in and offered you half of what you thought a house / business was worth...you wouldn't say, 'oh no! The market has fallen, I better sell' - I know you wouldn't. You'd think, 'what an idiot, low ball offer...this is worth way more than that'. Similarly, if someone came in and offered you 4x what you think it's worth, you might say, 'screw it' to your original plans, and just sell to the idiot.

With property it was more to do with luck than anything else. Right time right place. Gone are the days of 300% gains and more
and gone are my portfolio of rentals. The only property left is freehold Business and a few in Super. Property is very different it takes 6 mths to move from sale to settlement. Stock a click of the mouse. I cant understand why you wouldn't take massive advantage of that. Your right on both counts with your analogies in a property context. In a Share context I wouldn't let it get to 50% off its highs.

Tech/a that chart you posted of Credit Corp Group (ASX Code: CCP) is actually my largest holding and has been for years. I held it without selling a single share for many years and I have done well from it long-term despite the big drop and subsequent recovery. I added to my position at the $12.50 capital raising price, (but didn't manage to buy shares at the bottom below $7 due to lack of available funds). What you are saying sounds good in theory but did you actually trade it that way?

@Value Hunter no I didn't trade it its an example as are many many others out there. @notting asked me to show how Id have traded it and I presume done better. As for not having enough funds had the holding been sold at -20% from the highs you'd have had massive funds and massive increase in holdings and eventually capital growth AND a heap more dividends. Page 109 in Radges book the 20% flipper to page 117. Doubt Radge trades it either but is it less useful? Should read it its eye opening.

By the way @Value Collector lost $54,000 today (FMG). Now that might not bother him but as a business owner it sure alarms me!

The breakdown, 95 stocks in total.

• 5 x 100% loss
• 6 x more than 50% down
• 9 x more than 1 but less than 50% down
• 11 x taken over at profit
• 35 x less than 50% in profit
• 24 x more than 50% in profit
• 3 x up over 100%
• 4 x up over 400%
• 1 x up over 1000%
• 1 x up over 5000%
• 1 x up over 7000%

@So_Cynical
Well that depends on a lot of things. Amount of capital in each winning and losing trade.
I agree most would be better off holding infinitum but there is no guarantee that ending capital will be higher than the total capital invested overtime either. Just have a look at Managed funds that have long-term negative results over a great number of years.
AND they have 30 story buildings full of analysts!
But I certainly agree with managing your own portfolio ---I wouldn't leave it to anyone else. If I stuff up a decision I can handle that but I cant handle mismanagement from others (With my money)

 

[Value Collector]

Home with a huge dose of the flu!



With property it was more to do with luck than anything else. Right time right place. Gone are the days of 300% gains and more
and gone are my portfolio of rentals. The only property left is freehold Business and a few in Super. Property is very different it takes 6 mths to move from sale to settlement. Stock a click of the mouse. I cant understand why you wouldn't take massive advantage of that. Your right on both counts with your analogies in a property context. In a Share context I wouldn't let it get to 50% off its highs.



@Value Hunter no I didn't trade it its an example as are many many others out there. @notting asked me to show how Id have traded it and I presume done better. As for not having enough funds had the holding been sold at -20% from the highs you'd have had massive funds and massive increase in holdings and eventually capital growth AND a heap more dividends. Page 109 in Radges book the 20% flipper to page 117. Doubt Radge trades it either but is it less useful? Should read it its eye opening.

By the way @Value Collector lost $54,000 today (FMG). Now that might not bother him but as a business owner it sure alarms me!



@So_Cynical
Well that depends on a lot of things. Amount of capital in each winning and losing trade.
I agree most would be better off holding infinitude but there is no guarantee that ending capital will be higher than the total capital invested overtime either. Just have a look at Managed funds that have long-term negative results over a great number of years.
AND they have 30 story buildings full of analysts!
But I certainly agree with managing your own portfolio ---I wouldn't leave it to anyone else. If I stuff up a decision I can handle that but I cant handle mismanagement from others (With my money)

You are a business owner aren’t you? The value you could sell your business for would fluctuate day to day just as FMG does, your just don’t see it because your business isn’t listed on the market.

If you owned a business worth millions of $$$ and checked what price it would sell for in a fire sale on a daily basis I am sure you would find fluctuations of more than $50,000 per day quite routine.

just as you aren’t probably alarmed by the daily change in the market price of your business interests that are unlisted, I am equally unphased by changes in the market price of my listed businesses.

I don’t cheer when my portfolio is up $100k on a Monday and I don’t cry when it’s down $100k the next day, I base whether I am doing well on whether my valuation is growing or shrinking.

My dividends in the last 12 months from FMG and Others are double what the Prime minister earns, and probably more than you earn from all you business interests combined, when you have that cashflow coming in, daily market price fluctuations can be largely ignored.

I am in the business of investing, not trading if you have ideas about how I should be doing things better, maybe apply them to your own situation, because believe me I am pretty happy with the situation I have built for myself, and am not at all interested in becoming a trader.

 

[So_Cynical]

The massive upside for my 95 stock portfolio came from 5 stocks that were purchased as micro or small caps mostly after bad news or months of share price decline, CHN a massive turn around story, anyway all 5 stocks that a real manager would not of touched until they had become mid caps at least, thus missing most or maybe half the % increase.

Buy and hold for the stocks that i bought, at the time i bought them would of worked wonderfully well, the whole portfolio would of been up maybe 10x over 15 years and equal weight on entry, the best thing i could of done was nothing, hypothetically.

 

[Value Collector]

Buy and hold for the stocks that i bought, at the time i bought them would of worked wonderfully well, the whole portfolio would of been up maybe 10x over 15 years and equal weight on entry, the best thing i could of done was nothing, hypothetically.

The way I operate is that I spend my time trying to figure out which stocks to populate my list with that will provide above average returns over time, rather than micro manage trading in and out of them.

You are correct that once you populate that stock list with a bunch of high quality businesses, the best thing you can do is nothing.

I find one of the Best examples in my portfolio is CBA, as I said above, I bought it 25 years ago for $12.50 and it’s now $100, but it’s also paid nearly $80 in dividends.

Thats $180 of value for something that cost $12.50, you would think that must be impossible to lose money on, but plenty of people that jumped in and out of the market over the last 25 years have lost money on CBA.

 

[frugal.rock]

Home with a huge dose of the flu!

So, is that a buy and hold, or are you going to activly manage it? ?
A "huge dose" might need some good trade management ?

Had thought "flu" was non existant these days, unless it's the "new" flu... am guessing you've had a Corona test to be calling it flu?.
Good to see some sanity (imo) returning to NSW...

Back to topic, have been trying to do both...
LPD for example is one I have held and traded from 0.013, I don't mind jumping off on the bigger gains, then jumping back on 1 to 3 (or more) ticks lower, whilst still trying to hold at all times.
Using this technique, I have learnt that you may miss out on a decent good news gap, due to being temporarily out.
Frustrating, thus presenting a good argument to just bloody holding...very boring...?

 

[Miner]

Home with a huge dose of the flu!



With property it was more to do with luck than anything else. Right time right place. Gone are the days of 300% gains and more
and gone are my portfolio of rentals. The only property left is freehold Business and a few in Super. Property is very different it takes 6 mths to move from sale to settlement. Stock a click of the mouse. I cant understand why you wouldn't take massive advantage of that. Your right on both counts with your analogies in a property context. In a Share context I wouldn't let it get to 50% off its highs.



@Value Hunter no I didn't trade it its an example as are many many others out there. @notting asked me to show how Id have traded it and I presume done better. As for not having enough funds had the holding been sold at -20% from the highs you'd have had massive funds and massive increase in holdings and eventually capital growth AND a heap more dividends. Page 109 in Radges book the 20% flipper to page 117. Doubt Radge trades it either but is it less useful? Should read it its eye opening.

By the way @Value Collector lost $54,000 today (FMG). Now that might not bother him but as a business owner it sure alarms me!



@So_Cynical
Well that depends on a lot of things. Amount of capital in each winning and losing trade.
I agree most would be better off holding infinitum but there is no guarantee that ending capital will be higher than the total capital invested overtime either. Just have a look at Managed funds that have long-term negative results over a great number of years.
AND they have 30 story buildings full of analysts!
But I certainly agree with managing your own portfolio ---I wouldn't leave it to anyone else. If I stuff up a decision I can handle that but I cant handle mismanagement from others (With my money)

@tech/a - get well mate from flu. Thankfully you are not in mining otherwise, there would have been a panic with flu, quarantine, nurse comes to check your PCR until you are cleared. Once again get well and thanks for very lovely interaction between you, @Value Collector , @So_Cynical , @Value Hunter , @9k and others on this thread, I am visiting for the first time . Very educative indeed and inspiring thread.

 

[tech/a]

So finally you long term holders are advocates for
Averaging Down even if below your buy price?
Believe you haven’t made a loss until you sell an
investment at a price lower than you bought it.

How as a business do you value your net worth?

So Cynicals win rate is the highest I’ve ever seen
80% long term winning trades is world class.
30% is common
50% is unheard of!

 

[Value Collector]

1. So finally you long term holders are advocates for
Averaging Down even if below your buy price?

Yes, of course if think something is good value at $10 and later I can buy it for $8, then yes it make sense to buy more, my original buy price is irrelevant, what is relevant is what I believe the asset is worth.

for example if you want to own a bunch of gold in your portfolio and you buy some at $2000, if later you can buy some more at $1000, why wouldn’t you?

2, Believe you haven’t made a loss until you sell an
investment at a price lower than you bought it.

Not quite, I do believe I have made a loss before I sell if I believe the fundamental valuation of my investment has changed, not just the market price.

think of that bar or gold example, whether it is $2000 or $1000 you are buying/owning the same gold bar, just because it’s price changes doesn’t mean you suddenly own less gold, if you reasons based on facts to believe the drop in market price of gold is caused by temporary panic, and not sound fundamental reasons, you probably won’t feel like you have lost anything yet.

How as a business do you value your net worth?

You can come up with a range of valuations, just as you value any business.

for example you can value you business from the low range of its liquation value eg just the price of the assets, through to what those assets are worth to you as a going concern.

if it’s liquidation value is higher than what those assets are worth to you are a going concern, you should sell them even if it’s at a loss, if the assets are worth more to you than their market price, you should buy more even if the market price has dropped.

 

[Austwide]

Cynical is not claiming a high win rate but revealing an observation, if he had held all stocks for up to 15 years his win rate would be very high.

Some people hold onto stocks for long periods until they do go positive or close to it. That's why we have breakouts in T/A.
The win rate may be high but overall profit is low.

Opportunities are lost as their stock sink lower tying up their capital.

Not knowing Clinicals numbers, I'm guessing if he left his money in, his number of trades would be much much lower, so the outcome profit would be much less. He may easily have missed some or all of the 5 big winners he mentioned.

 

[tech/a]

@Value Collector we will always differ.
I understand where you coming from as I understand those who become “free traders”
Ill never understand why selling high and buying low which can double or treble your net wealth
Isnt preferable to just holding and at times never to old highs even 20% off of those highs.

I like to be proactive standing at the door of my business continually working in and on it.
Not opening the door and letting others do the work.

You have done very well way better than most.
your happy and it’s working for you.

Me too.

 

[wayneL]

If I may, can I add in two factors here, one of which cannot be avoided, but should certainly be accounted for in calculations when comparing methodologies.The other can be used to smooth out volatility and perhaps even juice returns.

1. TAX

2. Options

FWIW

 

[divs4ever]

@Value Collector we will always differ.
I understand where you coming from as I understand those who become “free traders”
Ill never understand why selling high and buying low which can double or treble your net wealth
Isnt preferable to just holding and at times never to old highs even 20% off of those highs.

I like to be proactive standing at the door of my business continually working in and on it.
Not opening the door and letting others do the work.

You have done very well way better than most.
your happy and it’s working for you.

Me too.

well i can only expand on what i do , but when i reduce a holding ( as opposed to exit completely)

as an example the MQG holding in 2014 was getting rather large ( as a proportion to the portfolio ) and BHP was in a downward trajectory so i swapped a fair amount of MQG into BHP ( after the SYD divestment , but before the S32 spin-off , it wasn't actually planned like that , but it happened )

now SOMETIMES i will buy more of a stock i have sold down , but there is no guarantee i will ever buy another extra share in that company again

obviously price movement and management decisions have a big influence if whether i buy extra shares of a 'free-carried ' company


a different example would be WHC i first bought in November 2013 @ $1.56 , reduced in August 2017 @ $3.55 , bought some more in August 2020 @ $1.29 . and reduced again in October 2021 @ $3.55 ... i don't hate WHC , but don't want to be holding a big chunk of them while these climate maniacs are trying to shape global policies ( the investment cash is in the bank waiting for a new home , and the profits are running as best they can )

you might note i change strategy if and when i see the best choices

had i kept all the MQG it would now be around 20% of the portfolio ( because i participate in the DRP ) instead of around 6% currently

if MQG comes back to $20 again , i would probably more , but i don't expect that to happen without some scary moments

 

[tech/a]

well i can only expand on what i do , but when i reduce a holding ( as opposed to exit completely)

as an example the MQG holding in 2014 was getting rather large ( as a proportion to the portfolio ) and BHP was in a downward trajectory so i swapped a fair amount of MQG into BHP ( after the SYD divestment , but before the S32 spin-off , it wasn't actually planned like that , but it happened )

now SOMETIMES i will buy more of a stock i have sold down , but there is no guarantee i will ever buy another extra share in that company again

obviously price movement and management decisions have a big influence if whether i buy extra shares of a 'free-carried ' company


a different example would be WHC i first bought in November 2013 @ $1.56 , reduced in August 2017 @ $3.55 , bought some more in August 2020 @ $1.29 . and reduced again in October 2021 @ $3.55 ... i don't hate WHC , but don't want to be holding a big chunk of them while these climate maniacs are trying to shape global policies ( the investment cash is in the bank waiting for a new home , and the profits are running as best they can )

you might note i change strategy if and when i see the best choices

had i kept all the MQG it would now be around 20% of the portfolio ( because i participate in the DRP ) instead of around 6% currently

if MQG comes back to $20 again , i would probably more , but i don't expect that to happen without some scary moments

Your actively managing your portfolio.

 

[divs4ever]

another difference is i ( normally ) look at it , as locking out the possibility of a capital loss ( on that share ) as opposed to 'taking some profit off the table '

so if a company takes an unpleasant turn , i can decide how much 'profit i will crystallize ( sell quickly or wait for a .. say . 5% bounce before jumping )

 

[Value Collector]

@Value Collector You have done very well way better than most.
your happy and it’s working for you.

Me too.

It really did all start from delivering News papers as a kid, those first CBA shares I purchased 25 years ago when I was 14 were bought for 1 reason only, which was to generate dividend income so that could one day give up delivering newspapers, hahaha.

My mindset has never changed, for me it’s all about owning enough income generating assets so that I don’t have to spend my days folding and delivering papers, it took me 22 years, but I was able to give up all paid work and retire at 36, simply by working and saving hard, and ploughing my savings into buying great businesses for less than they were worth and holding them for as long as they remain great businesses.

I split my time between learning about business valuation rather than trading, and working to earn the capital to invest.

 

[divs4ever]

Your actively managing your portfolio.

yes i am ( but not trading as a professional would ) , but that wasn't what i planned starting out in 2011

i originally planned to buy and hold ( and add as i had spare cash ) but then sensible opportunities came along ( now and then )

now obviously if you have a stable salary and surplus income , standard buy/hold ( and add ) strategies probably suit you better

however here i am on a disability pension and plenty of gaps between medical appointments , i can dabble and learn instead of Facebook or watching old movies ( i hadn't watched because i was working back then )

the DOWNSIDE is it is hard for me , now , to recover from capital losses , so i would rather not blow up the entire nest egg ... sure i am going to lose some , but i also hope to save a golden goose egg or two for my later years

 

[systematic]

Home with a huge dose of the flu!



With property it was more to do with luck than anything else. Right time right place. Gone are the days of 300% gains and more
and gone are my portfolio of rentals. The only property left is freehold Business and a few in Super. Property is very different it takes 6 mths to move from sale to settlement. Stock a click of the mouse. I cant understand why you wouldn't take massive advantage of that. Your right on both counts with your analogies in a property context. In a Share context I wouldn't let it get to 50% off its highs.

Firstly, hope you feel better!
Secondly, thank you for getting back. This is fun, and educational (for me, anyway)

Thirdly...
Running a stop (5%, 10%, 50%, volatility based, market regime based...name it)...it doesn't work with my systems. Maybe I'm missing something that others get. I cannot get the data to justify a stop of any kind, based on the model I run.
So, why wouldn't I let an individual stock run 50% from it's high. History shows that I'm better off holding (as long as the system calls it a hold), because - on average (which is what systems trading is all about - it will rebound more as a genuine, original signal vs selling and buying a new signal.