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Will Buying and Holding forever work out in the stock market?

27 May 2016

moatnew

While we enter in to the world of stock markets, many of us think that there is a magical formula that can get you rich over night by trading. There may be only few who discover this as they are smarter than the others out there. But in almost all cases the money brought in to the table gets vanished by continuous trading.

Buy and hold strategy simply means that holding on to your investments for a longer period of time. It can be 10, 20, 30 years or even for a lifetime. The idea behind the strategy is simple; as the high quality business that we are holding on for a time expected to provide good returns in the future. So the best time to exit the investments is like almost never as long as future potential of the company doesn’t look bad.

There are only few in the market who practices this strategy like legendary investor Warren Buffet for a long time and even these days many of the market pundits accepts the effectiveness of this strategy. As it is a rare phenomenon to find investors actually following & practicing it, they are either prone to book profits at every opportunity or exit the complete investments in the business within short period of time. Moreover this may even lead the investors not to come back again to stock markets as the quantum of loss they make by short term trades would be more than the quantum of profit they book.

An analysis of returns generated in investing in the equity funds shows that if one invests in the equity markets only for a year , the probability of getting return from the investment is very rare. But if the investor change the time horizon to 8 to 10 years or more , the probability almost comes to zero as long as the quality business stay there with positive cash flows.

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