Long-Term Buy and Hold has become unfashionable recently, but it is the easiest way by far to make money in the stock market.
Sit back. Relax. Put your feet up. Make money.
The stock market has its ups. It has its downs. This causes some investors to fret. But there's no need to. Just take it easy.
When the prices of shares decline, many people lose faith in the simplest, no-brainer way to make money on the stock market: long-term buy and hold (LTBH).
Nothing could be simpler than LTBH. You find some good quality shares and you hold onto them through thick and thin. It's what Warren Buffett, arguably the most successful investor of all time, does. "Lethargy bordering on sloth remains the cornerstone of our investment style," he says.
The other way, frantic activity bordering on panic, is the Clever Clogs way. An investor following this style tries to second-guess the market and attempts to understand all the factors that might move the share price up or down. He or she trades in and out of stocks frequently. Consequently, he or she is constantly stressed and is probably rude to children and old people.
According to James P. O'Shaughnessy the author of "What Works on Wall Street", people just can't process the amount of information that the Clever Clogs style demands. So they use heuristics, a fancy word that means 'rules-of-thumb' to arrive at decisions. These rules-of-thumb, probably hard-coded into our brains by evolution, might have been useful for avoiding angry lions on the savanna, but they don't work in the stock market. Clever Clogs therefore usually loses money.
The better way is the Thickie, or, dare I say it, the Foolish way of investing. Unlike Clever Clogs, Thickies know they don't know everything and therefore only use simple valuation tools to find stocks. Knowing that they can't predict every movement in the share price, Thickies are happy to hold onto their shares for a long time.
Thickies sit back, do nothing and find themselves making money. Meanwhile Clever Clogs usually fare less well.
To avoid those nasty heuristics that are the undoing of so many would-be investors, here are some simple Thickie LTBH investing methods:
1) Buy a tracker fund The performance of trackers is unlikely to be spectacular, but because they use a simple share selection method -- buy shares in big and successful companies -- they've performed well over time. I expect that will continue in future.
2) Invest in an equity income fund. These work because the fund managers are forced to use one simple value metric when they buy shares -- a high dividend yield.
3) Construct a High-Yield Portfolio. These are discussed extensively on the Fool.
4) Construct a portfolio using some other simple valuation metrics such as low price-to-earnings or low price-to-book-value.
Using simple techniques like these, you have a great chance of making money without stress and with the minimum of hassle.
Perhaps, using these techniques, you can find a fantastic share that you'd never want to sell. The late great investor Philip Fisher bought shares in Motorola
(NYSE: MOT)
in 1955 and still hadn't sold them at his death in 2004.
Now, that's what I call long-term buy and hold.
