You may be familiar with several investing strategies from those that espouse following charts, technical trading, momentum investing or one strategy actively followed by the world's greatest investor Warren Buffett – buy and hold.
You could split them into technical analysis on one side and fundamental analysis (Buy and Hold) on the other.
I can understand the attractiveness of being tempted to use charts as signals of when to buy and hold. Wouldn't it be great if all you needed to know were some simple charting methods? Chart says buy, so you buy – or chart says sell, so you sell and make a profit either way.
- You don't need to know anything about the company, currency, commodity or whatever else it is being plotted on the chart.
- You don't need to have spent hours studying the underlying business when it comes to the stockmarket.
The only problem is…
At least one study has shown that of the more than 5,000 most commonly used (wait, there's more?) technical trading rules, not one strategy works, leaving buy and hold as the only 'real' successful investing strategy. And there's plenty of proof that buy and hold works. In two words. Warren Buffett.
If you also look at some of the most successful Australian fund managers, guys like Kerr Neilson, Anton Tagliaferro and Hamish Douglass, they are all fundamental investors and follow a buy and hold strategy.
Want more proof?
3 of the top 10 performing newsletter services in the US happen to be from our parent company Motley Fool US, according to Hulbert's. Back in 2013, they were rated first, second and third over five years. Guess which strategy they follow?
Here at The Motley Fool, we've always subscribed to the strategy of buying great quality companies at cheap prices, holding for the long term and regularly topping up your holdings. So far its working for all four of our services – with performance more than double that of the index. Motley Fool Share Advisor is up over 50% compared to the All Ordinaries (IndexAsx: XAO) (ASX: XAO) up 15.7% as of today, both including dividends.
Consider some of our stock picks so far…
- Integrated Research Limited (ASX: IRI) recommended in December 2011 – now up more than 400%
- Vocus Communications Limited (ASX: VOC) recommended in Feb 2012 up over 200%, or
- Premier Investments Limited (ASX: PMV) up more than 111% since we recommended it in June 2013
A new approach?
Now some traders suggest that using a hybrid approach or a fusing of methodologies can enhance your returns. But that just leads to added complexity and confusion.
Using technical indicators to time your entry and exits is fraught with danger. No-one has been able to do it successfully over the long term. Not surprising really, given there are more than 5,000 different 'technical' indicators, none of which has been proven to be a reliable way to earn a market beating return. So chuck those moving averages, Bollinger bands, support and resistance and break-out rules in the bin.
Foolish takeaway
Buy and hold investing is really simple to understand, admittedly harder to put into practice. But a fusion of investing strategies can only lead to one thing – confusion. Stick to buying and holding quality companies and topping up when prices fall.
