Is Buy-and-Hold Investing Dead? (2024)

The janitor’s $8 million fortune … the most important chart in investing is now a headwind … how to invest when buy-and-hold is harder … Luke Lango’s AI approach

How does a janitor amass a stock portfolio valued at $8 million?

The true story of Ronald Read is one of the most beloved stories in investing. Read was a janitor in Vermont who lived well-below his means. He religiously squirrelled-away money into blue chip stocks, month-after-month, doing so for decades.

According to CNBC, quoting one of Reed’s friends, “I’m sure if [Ronald] earned $50 in a week, he probably invested $40 of it.”

Yet over the decades, these meager contributions compounded into an $8 million fortune.

We love stories like this. They give us hope that buy-and-hold investing combined with discipline, patience, and top-quality stocks will result in our own multi-million-dollar portfolios.

This is not that story.

Read had a tailwind at his back that you and I don’t have today. And while I’m not claiming that buy-and-hold won’t work going forward, we need to be clear-eyed about an enormous “then versus now” difference.

As you’re about to see, the single greatest contributing factor to Ronald Read’s multi-million-dollar portfolio is now working against us.

The question is “what do we do about it?”

What will happen when tailwinds turn into headwinds?

Warren Buffett once said “Charlie (Munger) and I don’t pay attention to macro forecasts.”

You can’t argue with Buffett’s results. But the most important chart in all of investing shows that a long-term macro variable has recently changed direction. This demands that we at least consider what appears to be happening and its implications for our portfolios.

I’m talking about a reversal in the multi-decade direction of bond yields – specifically, the 10-year Treasury yield, which is arguably the most important number in the global economy. Countless other rates around the world take their cue from the 10-year Treasury yield. For you Lord of the Rings fans, it’s a bit like “the one ring to rule them all.”

As we’ve detailed many times here in the Digest, stocks don’t like high bond yields. There are two big reasons why.

From a valuation perspective, higher bond yields put upward pressure on the discount rate used to value a company’s stock. Given the math involved in this calculation, the higher the discount rate, the lower the net present value of future flows, and vice versa.

So, higher long-term bond yields – and by extension, a higher discount rate – are a drag on stock valuations.

From a competition perspective, the higher the yield of “risk free” government bonds (if held to maturity), the more it lures conservative investors away from stocks. This creates another downward pressure on stock prices as investors pull their money out of equities.

Looked at from the other direction, when bond yields are falling, it gooses stock valuations, and reduces the attractiveness of the bond market. This steers investors into stocks, further inflating prices.

Now remember, bond yields and bond prices move inversely. So, with yields falling, that means prices are rising – that’s a bull market for bonds.

As you’re about to see, between 1981 and 2020, investors like Ronald Read benefited from the greatest bond bull market in history as yields collapsed over four decades.

By extension, this falling yield environment helped fuel four decades of enormous stock market gains.

Sure, there were bear markets along the way. But big picture, the trend was your friend in stocks.

Here’s how the S&P performed over this four-decade bond bull market.

Now, before we look at the flip-flop that has just happened in the 10-year yield, let’s address the implication we’ve glossed over so far…

If bond yields rise instead of fall, is that truly bad for stocks? And if so, where’s the proof?

When buy-and-hold doesn’t work

Most investors today have been conditioned to believe in “stocks for the long haul.” And while that market approach has proved beneficial for decades, older investors will remember a very different market environment.

From 1962 through 1982, treasury bonds were in a bear market. As the price of the 10-year treasury bond cratered, yields spiked from less than 4% to more than 15%.

And how did this two-decade-long bear market impact stocks? Were disciplined buy-and-hold janitors from Vermont rewarded with multi-million-dollar portfolios?

Not so much. Between February of 1962 and March of 1982, the S&P fell from 713 to 363.

This period of stock market pain resulted in BusinessWeek’s now famous “The Death of Equities” cover in 1979:

Sure, expert stock pickers could have generated fortunes during this stretch, but it was very difficult.

Take IBM, a market darling during those decades and a bedrock of many mom-and-pop portfolios. It was at the cutting-edge of technology and surely would have been a member of the “Magnificent Seven” had that existed during those years.

Between winter 1962 through fall of 1981, IBM had five stocks splits (of various amounts). After accounting for those splits, and also assuming reinvested dividends, IBM’s annual return over 19 years was just 2.62%.

This would have turned a $10,000 initial investment into just $16,346.

You’re not retiring on an annual return of 2.62% over 19 years.

Bottom line: When the 10-year Treasury bond is in a secular bear market, it’s a hurricane-strength wind blowing against stocks.

So, with that said, what’s happening now?

Are we about to reverse the conditions of the past four decades?

Below, we look at the 10-year Treasury yield, once again beginning in 1981. But we carry it through today.

You’ll see that the yield fell until reaching basically 0% in 2020 and then it’s been rising since.

Yes, the 10-year yield could reverse and move lower. But even if that happens, how much lower can it go?

How realistic is it to believe the 10-year yield will go negative and remain there for decades, goosing further stock market gains?

Remember, when sovereign bond yields go negative, they effectively require a bondholder to pay the government interest for the privilege of lending money to the government.

No one wants to do that.

It’s one thing for a temporary stretch of negative yields such as we saw in Europe and Japan in the late-2010s when those central banks were desperate to stimulate economic growth.

But counting on decades of negative bond yields to provide a tailwind behind a bull market in stocks? I don’t think so. Plus, the idea of “stimulating growth” is nightmare fuel for the Federal Reserve today and its fight against inflation.

Unfortunately, the 10-year yield has hit its lower boundary. And though yields could trade sideways for years to come, it’s misguided to expect a repeat of the 1981 – 2020 bond bull market that fueled stocks.

This is enormous headwind toward a Ronald-Read-style happy ending.

Now, that said, it doesn’t mean we can’t achieve a different type of happy ending that also offers a multi-million-dollar portfolio. It just means we’ll have to rely more on opportunistic trading, while being far more careful about our buy-and-hold assumptions.

“Buy-and-hold” is not dead, but it’s not the same safe bet that it was for Ronald Read

Yes, we still have megatrends so powerful that they’ll overcome a rising yield environment.

There’s Artificial Intelligence, precision medicine, quantum computing, and green energy to name a few. No one has a crystal ball, but the companies at the forefront of these trends will likely reward buy-and-hold investors in the coming years.

The key issue is finding the ones that will still be leaders one or two decades from now and will be able to grow their earnings despite a rising rate environment.

This is far more challenging today than three decades ago because technological advancements happen so quickly. Today’s leader could be tomorrow’s loser. We see this in the makeup of the S&P.

In 1965, the average life span of a company in the S&P was 32 years. In 2020, it was just 21 years. And if we zero in on what’s happened since just 2015, roughly one-third of the entire index has been replaced.

So, buy-and-hold isn’t dead, but unless the 10-year changes from its current trajectory, we’re headed into far more turbulent conditions that are better suited for opportunistic trading.

The simplest example of this is what happened with energy between late 2020 and earlier this year.

As you can see below, had you traded the Energy Select SPDR ETF based on its 200-day moving average for the broad trend and its RSI and MACD indicators for precision entry/exit timing, you would have more than doubled your money while the S&P fell into a bear market.

It’s beyond the scope of today’s Digest to delve into the specifics of trading, but for anyone curious, here’s an option…

Check out Luke Lango’s service AI Trader. It’s a technical trading service that just rolled out an artificial intelligence scoring feature that ranks how likely a stock is to race higher over the subsequent several weeks.

Here’s Luke describing the rationale behind this new AI offering:

I hate this constant oscillation between feeling euphoria and despair in the stock market.

Because that’s all the stock market has offered over the past three years: Euphoria one moment, despair the next, then euphoria, then despair, over and over again.

I like roller coasters as much as the next guy. But not with my money. Not with my emotions.

And that’s why we developed an AI-powered trading system dubbed Prometheus – to take the guesswork out of investing, and to replace uncertainty and volatility, with certainty and stability.

Luke and his team debuted their AI trading system less than a month ago. Here he is with the outcome so far:

In its first month in use, Prometheus AI has already pinpointed three different stocks that have all shot up more than 10%, including one that’s up about 25% in just a week…

In other words,Prometheus has been 100% accurate over the past month with its stock forecasts and has posted an average return of about 15%.

You know what the market has done over the past month? TheS&P 500is down more than 5%.

Whether you use a service like AI Trader or go at it alone, recognize the tectonic shift that appears to be underway in the investment markets

The 10-year Treasury yield has shifted its cardinal direction after four decades. This is enormous.

No, it doesn’t mean buy-and-hold is dead. But after 40 years of working in our favor, the most important trend in the global investment markets is no longer our friend, and it suggests a fundamental shift in the nature of the stock market.

But through trading, we remain nimble – able to capitalize on uneven market conditions, taking advantage of other investors’ kneejerk, emotion-based decisions.

Bottom line: The market is changing. Make sure your market approach is changing with it.

Have a good evening,

Jeff Remsburg