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May 7, 2009 (page 28)


Current low valuations
reward the long-term view

Dennis Butler

marginThe slide of the S&P 500 10-year return into negative territory in 2008 (to -1.4 per cent annualised) will have shocked investors who believe in the "buy and hold"¯ approach to stocks. It has also unleashed a flood of commentary proclaiming the superiority of active trading¯ strategies, as we read on these pages last week. Nothing could be further from the truth. Buying and keeping stocks is now more likely to produce good results than at any time in the last 35 years. It is irresponsible to suggest that investors could do better with "real time" trading. The evidence to the contrary is overwhelming.

marginIn 1950, mutual funds owned stocks for about five years; today that holding period is less than one year. Fund results exhibit no noticeable improvement and are even less impressive after trading costs and taxes are considered. The records of organisations known to favour rapid turnover do not inspire confidence: for example, half of hedge funds are expected to fold this year due to poor results and client withdrawals. Individual cases of trading and timing success, and the current frustration with the buy-and-hold orthodoxy, makes approaches that appear to help users avoid the big declines of the recent past more appealing. But very few market operators eluded the collapse that followed the October 2007 peak. For most people, active trading and asset allocation will disappoint.

marginGranted, the psychological impact of recent experience affects public sentiment about equity investment. The present situation is not unlike the early 1980s, when 15 years of stagnation caused equities to fall out of favour. Like their counterparts of today, promoters seeking to capitalise on the public's frustration with stocks pushed …opportunistic¯ trading strategies, usually involving options and futures contracts. But the pervasive pessimism of 1982 preceded one of the greatest equity bull markets in history.

marginThis does not mean we will experience the same going forward, but it does provide a perspective on investor expectations and sentiment during depressed markets, and should give one pause before acting on the advice of trading-oriented advisers who are buoyed by short-term success.

marginThe current challenge facing disciples of long-term investing is its recent poor track record: have patient holders not simply round-tripped, riding stocks up and down without taking advantage of selling opportunities? It is small comfort for an investor nearing retirement today to know that stocks do well in the long run.

marginBut too often the buy-and-hold approach is misinterpreted as being static and unresponsive to changing conditions. In fact, a long-term investment programme can successfully navigate through difficult periods so as to leave wealth intact and provide growth. The key is to pay reasonable prices. Negative returns over the course of a decade say more about the price of stocks 10 years ago than they do about the wisdom of buying and holding.

marginStrict buying discipline inevitably results in cash accumulation.  "Buy and hold"¯ is not synonymous with "never sell"¯; everything has its price. Occasional turnover, periodic takeovers and dividend income cause cash to rise, especially during ebullient markets when there is little to do. Long-term holdings decline in bear markets, along with everything else, but cash cushions the blow and provides the means to take advantage of new opportunities. Holding cash —¯ especially in a rising market —¯ challenges the "fully invested"¯ stance of most money managers and conflicts with their notorious fixation on short-term results. Nevertheless, it is an essential aspect of protecting and growing wealth.

marginToday, there is reason for optimism about long-term investing. On a rolling, 10-year basis, prices now are more depressed than at any time since 1974. Historically, a period of weak 10-year returns has been a good time to buy stocks. With valuations on a normalised basis far more attractive than one or two years ago, the present climate for investing in stocks is especially attractive for those whose investment discipline has left them with ample cash.


Dennis C. Butler, CFA, is president of Centre Street Cambridge Corporation, investment counsel. He has been a practitioner in the investment field for over 23 years and has been published in Barron's. He holds an MBA from Wharton and a BA in History from Brown University. His quarterly newsletter can be found at

"Intelligent Individual Investor", an article by Dennis Butler, appears in the December 2, 2008 issue of NYSSA News, a magazine published by the New Yorks Society of Security Analsysts, Inc. "Benjamin Graham in Perspective", an article by Dennis Butler, appears in the Summer 2006 issue of Financial History, a magazine published by the Museum of American Finance in New York City. To correspond with him directly and /or to obtain a reprint of his featured articles, "Gold Coffin?" in Barron's (March 23, 1998, Volume LXXVIII, No. 12, page 62) or "What Speculation?" in Barron's (September 15, 1997, Volume LXXVII, No. 37, page 58), he may be contacted at:

Dennis C. Butler
Centre Street Cambridge Corporation
Post Office Box 390085
Cambridge, Massachusetts 02139

Telephone: 617.441.9695


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Thomas A. Faulhaber, Editor

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Revised: May 7, 2009 TAF

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