Is “Buy and Hold” Dead?

The following is a guest post by Daniel at the Guru Five


Berkshire Hathaway is a well-capitalized group of diverse companies whose free cash flow is ably managed by the world’s greatest investor. However, the price of a share of Berkshire has declined by roughly 40% of late, wiping out years of gains. Is “buy and hold” dead?This question seems to get asked every time a period of bad performance is turned in–whether by one’s managers or by oneself. And, not surprisingly, the time frame for those who say “buy and hold” is dead–or should be–without fail is unjustifiably short.

Consider Berkshire. At 92,000 for a share, the price to own that much of the company has done all of nothing for the past three years. This is something new–right? It’s something that requires you to rethink finding a great company at a good price and then sitting on your hands and doing nothing–or is it?

In the lead-up to this year’s shareholder meeting, almost every journalistic introduction stated that this event would be more sober than in year’s past. After all, they said, shareholders have been used to the steady growth of Berkshire–year after year, without fail.

Consider though: periods of a company’s stock price not going anywhere for years is not something that just started over the past two. Not even for Berkshire.

For example, the stock price did nothing from around 1998 to 2003. Five years and nothing to show for it! Then, too, shareholders and journalists were asking: “Is ‘buy and hold’ dead?”

In actual fact, the “buy and hold” strategy is not dead–and should not be–it simply depends (as it always has) on what it is you are holding and the relation of its quoted price to what it is worth.

As Berkshire shareholders for the most part know: periods of underperformance come and go, but if the business is great, the prices paid for them good, and the cash they throw off invested accordingly, the market price will catch up with the growth in underlying business value at some point.

Rather than ask whether the “buy and hold” strategy is dead, asking how to find the companies that can be held long-term is sure to give a better answer.
Then, once you find them, it’s mostly a matter of finding out whether the company’s selling at an attractive discount from intrinsic value. (Given this environment, I’d guess that you’ll be in luck.)


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14 responses to “Is “Buy and Hold” Dead?”

  1. Nice post. Buy and hold invsting is far from dead, as long as you are decently diversified. The one thing that puts me off BRK.A or BRK.B is that Buffett doesn’t pay me a dividend. Thus I get no “feedback” during bear or flar markets.

  2. Jim says:

    Buffett doesn’t pay a dividend because he believes that itss more important to retain that money in order to increase shareholder value through reinvesting that money into the business. I believe that if you are invested into a business that has an able and competent management that has proven to be very effecting at producing a long record of a substantially high Cash Return on Invested Capital, it makes more sense for that company to retain its earnings in order to continue its performance record rather than to risk that performance by paying out a dividend. Also, since dividends are taxed, as an investor, it makes more sense to me to reduce my annual tax by avoiding dividend paying companies which ultimately lowers my annualized return profit.

  3. anon says:

    Jim, are you Jae? you seem to be the only person that consistently comments on here and you sound exactly like Jae everytime

  4. Jim says:


    🙂 no, I’m Jim. There are far more regular commentators than myself. I’ve been following Jae’s blog for sometime now and have always enjoyed his advice as well as finding a common ground with it. We seem to rationalize alike and maybe that is how you have found our similarities.

  5. Jim says:

    Another big difference between Jae and myself is that fact that he can revise his postings when he notices his typo’s. I can’t and you’ll find plenty of irritating typo’s in my messages 🙂

  6. Jae Jun says:

    @ DGI,
    Buffett is a great manager but as an investment BRK has never enticed me. I don’t expect them to grow any faster than the market so I would probably do better find something else that will yield a better return.

    @ Anon,
    Jim and I are two different people. I wouldn’t bother going under different personas on my own blog lol.

    @ Jim,
    Thanks for clarifying.

  7. I think it depends on the definition of buy & hold. I think my definition differs from the author’s and many others here. Whenever I hear ‘buy & hold’ I take that to mean as a blind buy & hold–basically a passive approach to investing. I don’t think of Berkshire Hathaway or any individual company whenever someone mentions buy & hold (although Berkshire is a large conglomerate and is a somewhat rough proxy for the market.) I think of buying and holding the full market (i.e. passive ownership of a basket of stocks or the whole market.) Buying & holding individual securities is not really ‘buy & hold’ to me; rather, I would consider it stockpicking.

    In my view, buy & hold is dead! It has basically been dead since 2000. Buy & hold, if we assume it refers to buying a basket of stocks and holding them, did really well in the 80’s and 90’s. The main reason was that there was a huge stock market boom–the 2nd best stock market boom after the 1920’s. The decline in interest rates was icing on the cake for equity investors.

    After the dot-com bust, which ushered in the bear market, buy & hold has been dead in my opinion. The crash from the credit bust probably seals the fate of buy & hold. My feeling is that buy&hold will do poorly in bear markets and if the current bear market persists, it will be a rough period for buy & hold (although some say a new bull market may have started.)

    Sivaram Velauthapillai’s last blog post..Opinion: Auto industry set for a huge shake-up

  8. Jim says:

    I think if you look at the track records of value investors who use a buy & hold approach to stock selection, you’ll find that they’ve produced an above average return over an extended period of time, regardless of the decade period. The idea that a buy & hold principle to investing is dead is not only baffling to me, but it doesn’t make any sense. I view the idea of buy & hold as buying a portion of a business at a discount to its underlying value then holding that position for a period of time until that underlying value has been recognized. It doesn’t matter if it takes 5, 10, 20, 30, or a lifetime to reach that period of realization because that’s not the point of buy & hold to me.

  9. Jae Jun says:

    @ Sivaram, Jim

    Although I call myself a buy and hold investor, my definition is that I just don’t day trade. I’ve never considered buying and holding till I die a realistic thing to do since I will require the money to either make big purchases, start a business or give it away. So while I don’t consider it dead, it has never been something I have focused on. I agree with Sivaram that it leans more towards the stock picking. I wouldn’t mind holding AEO or KTII if it went up forever, but it won’t, so I’ll sell when I have to. So you and Jim are really saying the same thing. Just from a different angle but overall its the same and I think the same too.

    Even buy and hold managers sell. Buffett’s buy and hold is literally buying and then dying which is what the media tends to focus on since if Buffett says it, to them it must be true.

  10. Susan says:

    “I wouldn’t mind holding AEO or KTII if it went up forever, but it won’t, so I’ll sell when I have to.”

    — Jae, exactly, totally agree. But could you please tell more about, in general principle, when it is the time “have to sell”. I think knowing when to sell is as important as knowing when to buy. Thank you.

  11. Jae Jun says:

    You’re right. It’s just as important as you say Susan.

    Honestly, for me, selling is one of the hardest things to do because it’s all psychological. Buying simply involves doing my homework and then setting a low entry point for a company that I like and is cheap. Selling on the other hand goes against our human nature. When things go good, we start to believe it will keep getting better, eventually to find most of our gains has been erased.

    So something that should be done before making a purchase is to determine your exit price range and be emotionless about it. One way is to pre enter a sell order at your sell price or put in a trailing stop (although I’ve never done this). Or write down the sell price next to your buy price in your portfolio tracking spreadsheet or software so that you don’t forget and get caught up in the rush upwards.

    I may have to write a post on this in order to remind myself as well. I’m keen for feedback and advice myself 🙂

  12. Monevator says:

    People who think buy-and-hold is dead because we’ve had a bear market or ten years of 0% returns overall or similar need to think twice.

    The very reason investing in equities works is *because* these periods of under-performance stop people putting all their money in the markets, and thus bidding up assets to destroy the superior returns we expect from stocks.

    That said, I think buying and holding an index makes more sense then buying and holding individual stocks for 50 years. The world moves too fast these days for that strategy.

  13. Jim says:

    Obama is devaluing dividends by raising taxes.

  14. Maddux says:

    I completely agree with what you’re saying. I believe that a buy and hold philosophy will work if you are a lifelong investor. If you try to jump around too much chasing the market, you will inevitably fail.

    Here’s a great article that makes a few more points about why buy and hold is still alive and well:

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