The Alchemist: Why Buy and Hold?

Posted in Money Matters on December 8, 2002

The following is this week’s installment of The Alchemist, a column by Mensan Al Thomas, author of If It Doesn’t Go Up, Don’t Buy It. Click ‘Read More’ below for this week’s article, “Why Buy and Hold?”

The Alchemist: Why Buy and Hold?

by Al Thomas


Since I can remember, and that’s a long time ago, the Wall
Street brokerage companies, mavens and mutual fund managers have been
exhorting the mantra of Buy and Hold for all your investments. There have
been erudite studies published that this is the only way to go.


Does it really work or has the little investor been
lied to all these years. Of course, you know the answer if you have owned
any stocks or funds for the past 3 years. From my analysis the latter is
true. The big boys buy and sell all the time. If you look at the executives
of companies it seems they all know when to sell – right at the top before
their own company stocks decline. This is easily proven, as the SEC requires
all listed-company executives must report both buy and sell transactions. It
is not the same as an “insider” sale, but it might as well be, as those guys
know if the company is making or losing money. The past couple of years the
preponderance of stock sales has been on the sell side.


These sales are easily understandable, but why do brokerage
companies want you to buy and hold, especially hold? There are 2 reasons.

First, they want to move inventory out of their ownership to you. That
transfers the risk and now they have your money.

Even more important, when you HOLD there is less stock for sale, less
“float” (fewer tradable issues), and that means it takes less money to
manipulate that particular issue.

Also fund managers don’t want you to sell their fund once you have bought it
because they get paid on the amount of money in the fund not on the
performance of the fund. This is a great rip off of the investor causing him
to hold an asset that is worth less and less. Many of the large fund
managers are paid 7 figure salaries. How can a so-called professional
manager receive more than a million dollars to lose money for his clients?

Yet, they do!

Buy and hold is a farce perpetrated on the small investor. There are 78
million mutual fund owners and 80% of them have less than $50,000 in their
accounts. No one ever says SELL.
Here is one more fact you will not read in the financial media. Mutual funds
only work during bull markets. The bull market that started in 1974 (some
say 1982) definitely ended in 2000. The longer a bull market is in effect
the longer is the bear market that follows and is usually about the same
length of time. Scary, huh?! But true.
Now what? Buy and hold? The facts speak for themselves. If you are not a
trader the safest place for your money during the next several years is in
U.S. government bonds. They won’t pay much, but you won’t lose your money as
this bear eats away at the stock market.


Copyright Albert W. Thomas. All rights reserved. Author of “If It Doesn’t Go Up, Don’t Buy It!” www.mutualfundmagic.com. Comments to al@mutualfundmagic.com.