Originally published: October 30th, 2016
Have you heard the tale? The tale of two churches? You haven’t?
Oh well let me tell you a tale:
The Tale of Two Churches, Part 1: The Church of Buy and Hold
The Church of Buy and Hold (CBH) is a broad and amorphous group that welcomes many faiths. Their beliefs aren’t precisely defined, but you’ll know them when you see them, because even though there isn’t a universal set of rules, any CBH compliant faith will be focused on owning stocks for the long-term.
These different faiths emphasize different ideals and philosophies that will vary from one denomination to another, but the themes can often be summarized by folksy aphorisms like:
“Our favorite holding period is forever.”
But emblazoned into the holy cannon is the first and possibly only universal commandment:
THOU CAN’T TIME THE MARKET, SO THOU SHALT NOT TRY TO!
You see, while the CBH maybe doesn’t have a universal set of rules, one thing they can agree on is that they don’t like “traders”. You see, the “traders” aren’t invested for the long haul, which means they’re trying to time the market. So this commandment is a convenient way to keep them out.
The Tale of Two Churches, Part 2: The Church of Trading
The Church of Trading (CoT) also includes a broad range of different denominations loosely centered around similar values.
You’ll know them when you see them because of all their charts.
They all use different systems for making sense out of their charts and there is some overlap. Fibonacci numbers come up a lot, they like to draw lots of lines, and the relevant pattern is always subject to a revised interpretation.
The CoT doesn’t have a core commandment like the CBH. The traders may find the CBH’s slavish rejection of technical price analysis pretty silly or at least single minded, but they don’t really care about what the buy and holders do because they’re too busy trying to figure out what wave count they’re in.
So the one holy commandment keeps the traders out of the CBH, and the buy and holders from straying into the dangerous halls of the CoT.
And everyone can be happy and snobbish about how smart their particular strategy is.
Which brings us to…
The Agnostic Buy and Holder
I don’t know about you, but I’m not ready to completely join one church or the other. I have to admit, the technical trading strategies look an awful lot like speculation, but on the other hand that commandment really bothers me.
The reason it bothers me, is that this one holy commandment is really just an expression of the efficient market hypothesis, which comes from the passive indexers’ holy cannon.
Now passive indexers (you might call them the Church of Bogle) are welcome in the CBH flock because they buy and they hold for the long term. But they buy and hold indiscriminately because they’re nihilists who don’t think you can beat the market so you should just dollar cost average into index funds and focus on your non-market related hobbies like golf.
So the passive indexers are the ones who originally came up with the holy commandment, and somehow it spread across all the denominations. It spread in spite of the complete cognitive dissonance with the other core buy and hold strategies (like value investing for example).
Many of those other buy and hold strategies involve individual stock picking, and as such incorporate some kind valuation process.
When you value a stock, you take the projected future earnings/cash flow/dividends/etc. and you discount them back to the present to determine a “fair” value for the stock’s shares. The idea is that you’re trying to buy stocks that are trading at or preferably below their fair value. If some stocks can trade below their fair value while others trade above it, then the market isn’t 100% efficient.
This is why you spend so much time researching individual stocks instead of playing golf.
But if you accept that stocks can be undervalued, you will naturally try to buy them at that time rather than when they’re overvalued. You will try to take advantage of the mispricing before the market corrects itself.
In other words…
YOU’RE TRYING TO TIME THE MARKET!
Never mind trying to time your exit point, although the same theory really does apply. If the stock is trading for over your fair value, you should probably think about selling it, but that’s a rant for another day.
The point is that any individual stock picking strategy inherently is trying to time the market on some level.
And yet so many buy and holders with portfolios full of individual stocks will get on their high horse and preach about how they don’t try to time the market since it’s a fool’s errand.
THOU CAN’T TIME THE MARKET, SO THOU SHALT NOT TRY TO!
Give me a break.
So that’s what I mean when I say that I’m an Agnostic Buy and Holder. Between the two churches, I have to admit that I lean towards the CBH, but I will proudly embrace the fact that I’m trying to time the market, because I refuse to fall for the efficient market hypothesis hook line and sinker.
If I’m trying to time the market in the long term relative to the “fair value” of the stocks I’m invested in, why not learn about the technical analysis, and at least dabble in it?
The beauty of the “hold” part of the “buy and hold” dogma, is that if you don’t quite get the timing right in the short term, you still have time on your side.
“Time in the market plus timing the market beats nihilistic passive indexing…”
…or something like that. I always get it mixed up.
I might attend the occasional CoT service, but I’m not going to any Elliot Wave Theory bible study classes. You see, the CoT needs to pick the tops and bottoms just right within their trading time frame. If they’re wrong, they can’t just sit on the trade for 3 years because they feel they need to move on and get as much of their capital back as they can.
I don’t think I could “trade” in this classic sense of the term because it’s really, really hard to consistently predict future price movements in the short term. It really does feel like a “random walk” at times doesn’t it?
But I don’t mind having a little fun trying to predict those future movements, and in the meantime I’ll use traditional fundamental value analysis to hopefully give myself a bit of a cushion.