Al from Florida wrote in with an interesting case study: is it more effective for a Rule #1 Investor to buy a wonderful company and hold it, vs. getting in and out with the Tools?
Phil,
I saw you at the Ft. Lauderdale "Get Motivated" seminar, I bought your book (actually 3 copies: mine, one for my daughter, and one for a friend), and signed up for the Investools web site.
I'm trying to reconcile the basic Rule #1 philosophy (as I understand it), with your desire for 'insurance' on your stocks so you don't lose money. Using your methodology to identify some good candidate stocks, I've been playing around with placing trailing stops at various percentages, and then buying back in using the technical indicators. The interesting thing I discovered is that (at least for the stocks I've been studying), the best action is to buy and hold. Period.
I admit that I don't have enough experience to know if all "Rule #1 stocks" behave similarly to the ones I've been studying (I expect that there are lots of exceptions, and they don't all go up throughout the year). However, these are real stocks, with real historical data, and I'm sure there are lots of others like them out there.
[Click on the image for a larger view.]
What are your feelings about buying and holding good Rule #1 stocks vs., say, placing a 20% trailing stop when buying? Am I just being naive as a new investor?
I know stocks can go down, as well as up, but how often does that happen (over the long run) for a good Rule #1 stock?
Anyway, thanks for your help to us new investors.
Al G.
Here's what I think:
Dear Al,
I took a look at your list. Very impressive bunch of companies that have done very well. And therein lies the problem with Buy and Hold vs. getting in and getting out.
Buying and holding a stock that goes up will always outperform getting in and out simply because getting in and out means that you miss the bottoms and the tops over and over, resulting in a kind of trading friction that eats away at your results.
It would seem, therefore, that buying and holding would be the superior technique for a Rule #1 investor. And, frankly, if you can handle the stomach-wrenching drops or a major market melt-down, then buy and hold is probably for you.
But for those of us who got out of great businesses in 2000 because of red arrows and then watched those businesses drop 50% of their value and never recover, buy and hold looks depressingly naive and scary.
At the end of the day, I'd rather give back some of the gains than risk my retirement.
That said, I'd like to see the results of one more study. How would things work out if you used weekly inputs to the toolset? Try using a 8-17-9 MACD with the inputs coming in weekly instead of daily. Same with the other two signals. This might be the best of all worlds for many investors.
Let me know how that looks.
Now go play!
Phil
P.S. Part II, with Al's followup, will post tomorrow.
Please also read Al's disclaimer about the chart used in this post:
Using it [my spreadsheet] involves downloading the daily stock data for the stock in question using MSN and windows explorer and importing that data into my spreadsheet. I may also clean it up a little so it's a little more straightforward for the average user to use.
[From Phil: I'll post Al's "cleaner" version once he has it ready. Please use charts in today's post as examples only.]
Remember, this group of stocks I was examining was not too volatile; I don't yet know how this will hold up with more volatile stocks.
