My mission is to “learn” the mysteries of the stock market through the power of technology. Armed with my knowledge of machine learning, quantum algorithms and “my passion for financial analysis”, I delved deep into the world of stock predictions for quite some time.
As I delved into the world of financial analysis, chart reading, and the intricacies of trading, I found myself lost in a sea of technical jargon and bewildering terms.
Amidst this confusion, there was one phrase that seemed to crop up time and again — “buy the stock and hold patiently”. It was touted as the golden rule of investing, a tried and tested method for success in the stock market.
But as I delved deeper, I began to question the validity of this statement. Was it really that simple? Could one truly expect to make a fortune by simply buying stocks and holding onto them for an extended period of time?
I consulted with trading experts and devoured countless books on the subject, including the enlightening “Black Swan”. My curiosity led me to an insightful book by Fred McAllen, titled “Charting and Technical Analysis”. In it, he discussed the Buy and Hold Theory and its limitations.
According to McAllen, the Buy and Hold Theory is based on the assumption that investing in “good” stocks will yield an average return of 10% per year. However, this theory only holds true under certain conditions.
McAllen cites the example of the 1964–1982 period, which was characterized by a sideways market with fluctuations, also known as a secular bear market. During this time, the Dow Jones Industrial Average remained stagnant, hovering around 874 in 1964 and only reaching the breakeven point of 875 in 1982. It wasn’t until the early 80s that investors who had bought mid-60s stocks began to see any return on their investment. Those who had bought near the bottom in the early 80s, however, saw staggering profits until the secular bear market came to a halt in 2000.
McAllen highlights that financial advisors often use a 20-year rolling time period to sell the Buy and Hold Theory to investors. This is because a 20-year time frame is long enough to get past an 18-year secular bear market.
However, the Buy and Hold Theory is not a foolproof strategy. Investors who bought stocks in the late 90s, 2000 or 2007 would have had to wait for years just to break even, much like buyers in 1929 who waited 25 years to break even.
McAllen concludes by cautioning investors to be wary of financial advisors who espouse the Buy and Hold Theory without taking into account the specific market conditions of the present day.
As a math enthusiast, I also find it intriguing to link the 18-year the Benner Cycle with the 9-year Draper Wave cycle.