***Attention: to all of you who are checking your portfolio six or seven times a day…Put down your BlackBerrys and turn off your laptops! Warren Buffett didn’t amass his fortune in mere hours, days or months. The secret to success in the market isn’t timing…it’s time.

The ticket to building wealth in the stock market — whether through small caps or blue chips — is to invest with long-term goals.

If people could predict the market (which they can’t), everyone would be reeling in absurd gains in just a few weeks.
Consider these numbers:

*Odds that you’ll win the lottery: 1 in 4 million
*Odds that Earth will be struck by a meteor during your lifetime: 1 in 9,000
*Odds that you’ll get snake eyes when rolling the dice: 1 in 36
*Odds that an investment in stocks will make money in any given year: 7 in 10.

Buy-and-Hold: Forever Unpredictable

Ric Edelman cited these odds and others for a piece he wrote on personal finance. He compared buy-and-hold strategies to market timing and found that — you guessed it — buy-and-hold strategies beat market timing almost 100% of the time. In fact, the exact win percentage for buy-and-holders is 99.8%, according to a Financial Analysts Journal study conducted for the years 1926-1999.

Here at Sleuth headquarters, we like to find all those great small-cap companies that are flying under Wall Street’s radar. But we too have to realize that there are so many aspects of Wall Street that will forever be unpredictable. You’ll never be able to accurately predict when everyone else will catch on to an undervalued stock — and push the price to its full value. That’s why a buy-and-hold strategy is crucial.

And other studies, like Edelman’s, prove time and time again the effectiveness of the buy-and-hold strategy.

Jim Shoemaker, president of Shoemaker Advisory Corp., in Memphis, writes that if you were out of the market during only the 35 top performing months between 1925 and 1996, you would only end up with a return similar to those of Treasury bills. And remember what value investor Joel Greenblatt says about
this type of investment: If a company can’t deliver returns exceeding a 10-year T-bill, it’s too risky. Why put your money in a company that might only provide you with 5% annual returns when you can have those returns guaranteed by the
government with T-bills? But like Shoemaker says, “You cannot get stock-like returns unless you are in the stock market. Invest for the long term and be patient.” 

Shoemaker noted a study conducted by H. Nejat Seyhum that analyzed the 7,802 days from 1963-1993. The study shows just how powerful holding stocks for the real gains can be. In fact, if you had started investing in 1963, but were out of the market on its best 90 days (which is only 1.2% of the time), you would have missed out on 95% of the market’s gains:
“One dollar invested in 1963 would be worth $24 in 1993, if the investor had stayed fully invested. The same dollar would be worth $2.10 if the investor had missed the magic 90 days.”

Buy-and-Hold: A Strategy in Place

So be smart…and be patient. The returns you’ve been waiting for will follow.

Until next week,

Gunner
January 16, 2006

Buy-and-Hold: Winning with Buy and Hold was originally featured in the Penny Sleuth.