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As some may know, I have started stock investing/trading again with two Australian ETFs, VDHG and YMAX. YMAX sells covered calls on the Australian ASX 20, while VDHG is a Vanguard fund of other Vanguard funds managed using Markowitz portfolio theory.
Anyway, I decided to supplement that by buying some direct shares, and other ETF's as recommended by a service here in Aus called Motley Fool (it is in other countries like the US as well).
This led me to investigate the buy and hold strategy practised by Warren Buffet compared to more active investing, which is why I haven't been posting much. What I found was surprising.
My investigations have shown buy and hold beats active approaches hands down when tax is taken into account - at least compared to the approaches I am aware of. Remember, when you sell a stock for profit, you pay tax. There is no escaping it. The caveat is you must buy suitable stocks/funds and use the right strategy. You can beat purchasing and holding an index fund after-tax, in fact, by a wide margin:
This, however, ignores the power of Dollar-Cost Averaging, where you regularly put money in the market, even during downturns. That can make a significant difference because during the times you would have been in cash, the market is cheap, and when it recovers, the money you put in then makes a larger than usual profit. This is illustrated in the following analysis of a stock picking service (in fact, the one I use, but it is their extreme opportunities service rather than the buy and hold stock advisor service - I will give its results later).
It just beat dollar-cost averaging into an index fund. After-tax, however, it would have lost. I do not know if the first moving average strategy detailed in my first link beats Dollar-Cost Averaging after tax, but it will be a lot closer.
The point to take from this is to buy and hold is very difficult, perhaps even impossible, after-tax, to beat if combined with dollar-cost averaging. You must regularly invest in the stock market. In the last few months, I have been buying direct shares/ETF's. I buy $1000 of the stock recommended by the stock advisor service each month. I also regularly add to my VDHG and YMAX ETF's. Unlike the extreme opportunities, it is buy and hold. Occasionally it will recommend selling a stock - but I plan to ignore it after seeing what happened to some stocks after they recommended selling it. Over time you will end up with many stocks - but that is OK. Some will perform poorly, some well, and occasionally super well. The super well stocks make are what seems to make the strategy more profitable than just buying the index. However, you can't predict which stocks will be that profitable. For example, they recommended buying Dominoes at $7 in 2012. Now it is $125. They recommended selling it and taking profits, but I would have kept it. Later they recommended repurchasing it at a higher price. That is why I personally will never sell - you can't predict what a stock will do long term. That is why I eventually (if I live long enough) will have a lot of stocks bought for $1000.00. You want to latch onto one of these super stocks. The others usually perform OK. The few duds have their loss limited to $1000.00, which is why I have no problem never selling. $1000.00 is the most I can lose.
Stocks like Dominoes do not come along often, but every couple of years, they do appear. Over the last ten years, a similar analysis was done comparing dollar-cost averaging into the index to stock advisor buy and hold picks. The index gave about 45% - their picks 75%. How is that possible when we have funds, ETF, etc., all trying to beat the index? Yet after fees nearly always fail? I think (but could be wrong) it comes down to buy and hold. Most analysts seem to have about a 1-year time frame in picking stocks. The Stock Advisor analysts have a 5-year time frame. Short term, the recommendations may not do well, but over the long haul, most do. What they want is a stock like Dominoes. Latching onto one of those is what gives the outperformance. Comments I have seen about their stock picks saying I am down - say 20% - what a rip-off - fail to understand the strategy. That is why professionally managed funds do not use it. Due to losses, the fund may go out the back door as people sell. You must have faith in the strategy.
So what is the takeaway here? Dollar-cost average into stocks/funds with good long term potential and buy and hold is a strategy very hard to beat. I use Motley Fool Stock advisor because they recommend stocks/funds (yes, they sometimes recommend funds like the NASDAQ 100) for the long term. I am sure other services and/or stock screeners can do a similar job. I leave finding those up to you.
One enhancement to the strategy has been shown to beat ordinary buy and hold. As Warren Buffet frequently does, it is to sell puts to purchase stocks on the cheap. But that is another story. I am looking to give it a try, along with other options strategies like the wheel, and see what happens. Selling covered calls on your accumulated stocks/funds is an excellent way to generate income when retired without selling your shares/ETF's. Some stocks that have boomed, like Tesla, pay no dividend yet have risen, like Dominoes to large prices (that stock does pay a small dividend).
Thanks
Bill
Anyway, I decided to supplement that by buying some direct shares, and other ETF's as recommended by a service here in Aus called Motley Fool (it is in other countries like the US as well).
This led me to investigate the buy and hold strategy practised by Warren Buffet compared to more active investing, which is why I haven't been posting much. What I found was surprising.
My investigations have shown buy and hold beats active approaches hands down when tax is taken into account - at least compared to the approaches I am aware of. Remember, when you sell a stock for profit, you pay tax. There is no escaping it. The caveat is you must buy suitable stocks/funds and use the right strategy. You can beat purchasing and holding an index fund after-tax, in fact, by a wide margin:
This, however, ignores the power of Dollar-Cost Averaging, where you regularly put money in the market, even during downturns. That can make a significant difference because during the times you would have been in cash, the market is cheap, and when it recovers, the money you put in then makes a larger than usual profit. This is illustrated in the following analysis of a stock picking service (in fact, the one I use, but it is their extreme opportunities service rather than the buy and hold stock advisor service - I will give its results later).
It just beat dollar-cost averaging into an index fund. After-tax, however, it would have lost. I do not know if the first moving average strategy detailed in my first link beats Dollar-Cost Averaging after tax, but it will be a lot closer.
The point to take from this is to buy and hold is very difficult, perhaps even impossible, after-tax, to beat if combined with dollar-cost averaging. You must regularly invest in the stock market. In the last few months, I have been buying direct shares/ETF's. I buy $1000 of the stock recommended by the stock advisor service each month. I also regularly add to my VDHG and YMAX ETF's. Unlike the extreme opportunities, it is buy and hold. Occasionally it will recommend selling a stock - but I plan to ignore it after seeing what happened to some stocks after they recommended selling it. Over time you will end up with many stocks - but that is OK. Some will perform poorly, some well, and occasionally super well. The super well stocks make are what seems to make the strategy more profitable than just buying the index. However, you can't predict which stocks will be that profitable. For example, they recommended buying Dominoes at $7 in 2012. Now it is $125. They recommended selling it and taking profits, but I would have kept it. Later they recommended repurchasing it at a higher price. That is why I personally will never sell - you can't predict what a stock will do long term. That is why I eventually (if I live long enough) will have a lot of stocks bought for $1000.00. You want to latch onto one of these super stocks. The others usually perform OK. The few duds have their loss limited to $1000.00, which is why I have no problem never selling. $1000.00 is the most I can lose.
Stocks like Dominoes do not come along often, but every couple of years, they do appear. Over the last ten years, a similar analysis was done comparing dollar-cost averaging into the index to stock advisor buy and hold picks. The index gave about 45% - their picks 75%. How is that possible when we have funds, ETF, etc., all trying to beat the index? Yet after fees nearly always fail? I think (but could be wrong) it comes down to buy and hold. Most analysts seem to have about a 1-year time frame in picking stocks. The Stock Advisor analysts have a 5-year time frame. Short term, the recommendations may not do well, but over the long haul, most do. What they want is a stock like Dominoes. Latching onto one of those is what gives the outperformance. Comments I have seen about their stock picks saying I am down - say 20% - what a rip-off - fail to understand the strategy. That is why professionally managed funds do not use it. Due to losses, the fund may go out the back door as people sell. You must have faith in the strategy.
So what is the takeaway here? Dollar-cost average into stocks/funds with good long term potential and buy and hold is a strategy very hard to beat. I use Motley Fool Stock advisor because they recommend stocks/funds (yes, they sometimes recommend funds like the NASDAQ 100) for the long term. I am sure other services and/or stock screeners can do a similar job. I leave finding those up to you.
One enhancement to the strategy has been shown to beat ordinary buy and hold. As Warren Buffet frequently does, it is to sell puts to purchase stocks on the cheap. But that is another story. I am looking to give it a try, along with other options strategies like the wheel, and see what happens. Selling covered calls on your accumulated stocks/funds is an excellent way to generate income when retired without selling your shares/ETF's. Some stocks that have boomed, like Tesla, pay no dividend yet have risen, like Dominoes to large prices (that stock does pay a small dividend).
Thanks
Bill