Stock market investing isn’t always as easy as it seemed in the 1990s. Over 200 years of stock market history shows us that there have been seven generation-long bear markets that averaged 14 years in length, during which times money in the stock market generally lost purchasing power. Buy-and-Hold investors often suffer huge losses during these periods, yet traditional financial advice discourages changes that might protect portfolio values in a generation-long bear market. Does that seem odd to you?

train track

Big Wall Street institutions, many of whose names you would recognize, comprise what is called the “sell-side” of the financial services industry. These companies are in business to create new issues of stocks and bonds, and they must sell these financial products to someone else to free up their capital to create more new issues. Mutual fund companies continually offer new shares of their funds, and like the other institutions, must constantly bring in new buyers or they risk going out of business. All of these companies sell, sell, sell. And for every seller, there must be a buyer, or the market will have problems. So, who do you think Wall Street wants the buyers to be? You! Buy and hold, forever, is the way Wall Street wants you to invest. But should you?

The truth is, you don’t need Wall Street, but they need you. If you think about it, you’ll see that Wall Street institutions make most of their money when they have your money to work with. The last thing they want is for someone to sell and take their money and leave the “system”. So there has emerged a huge Wall Street propaganda machine that creates a constant drumbeat of, “Buy-and-Hold is the only way to invest.”  But is it, really?

Wall Street spokesmen often hold up investment greats such as Peter Lynch or Sir John Templeton as icons of Buy-and-Hold. Sir John Templeton and Peter Lynch became investing legends by making fortunes for their clients during the 16- year Generational bear market of 1966-1982. Wall Street would have you believe they were buy-and-hold investors, yet when one examines the record of investing that made them famous a different picture emerges. Templeton was always willing to sell if he found a better bargain, and in fact would turn his portfolios over every 3-5 years, on average. Peter Lynch, while running the Fidelity Magellan fund for 14 years, had an average holding period for his stocks of under 8 months. These are the icons of buy-and-hold.

A landmark study done for pension funds, called the Brinson Study, is frequently cited as saying “92% of investment returns come from asset allocation decisions”, so just diversify among various asset classes, and leave things alone. Stock picking and market timing combine for only 8% of returns, so don’t bother with them, leave that to our fund managers. Buy-and-hold. Sound familiar? To us, it seems that Wall Street took this study and twisted it for their own ends because our interpretation leads to a very different conclusion.

At Hepburn Capital Management, our interpretation of the Brinson study is that most of the differences in investment returns come from which asset class one is invested in at the moment. Ninety-two percent of gains stem from being invested in the right spot. And 92% of losses come from being in the wrong spot. We think that investors who can move from the wrong spot to the right spot will have a distinct edge over a buy and hope investor so we have developed several distinctive strategies that Adapt to Changing Markets®

Remember, even if you’re on the right track: if you just sit there, you can get run over by a train.

From the Financial Market Review, 2004