In today's high-paced investing world, you might think that buy-and-hold investing is a long-lost relic from a nearly forgotten age. But the investing style that Warren Buffett and countless other long-term investors have used to reap huge gains over the decades is far from dead — and rather than letting it weaken your resolve, pundits who pronounce buy-and-hold investing dead actually make it easier for long-term investors to do their jobs.
The rise of the machines
Recently, high-frequency trading has had a huge impact on the stock market. As a CNBC article (titled "Is the Buy & Hold Stock Strategy Officially Dead?") noted this week, figures from stock analyst Alan Newman show that exchange-traded funds have made it easier than ever for algorithm-driven machines to work their magic. The article cites the huge volumes of shares of the US SPDR S&P 500 ETF that trade every day, producing an average holding period of just five days. Looking more broadly at the US market, the average holding period for stocks overall has shortened from four years prior to 2000 to just over three months now.
Predictably, this has made the general public wary of investing in the market. Seeing institutions tripping over themselves to grab every cent of profit they can at the expense of slower-paced investors has convinced them that the market is rigged.
There's some truth to that belief. But it's only true if you force yourself to play the market's game. Fortunately, you don't have to do that.
Time is on your side (yes, it is)
Earlier this morning, I gave investors four tools you can use to beat uncertainty and rising complexity in your portfolio. I highly recommend reading that article, because all four suggestions are extremely useful if you're planning on investing for the long haul.
But the thing that's most important for buy-and-hold investors is time arbitrage. Short-term challenges often make investors nervous about a stock even when its long-term prospects aren't really under any big threat.
Taking this concept a step further, the things that high-frequency traders are looking for often bear no resemblance whatsoever to what long-term investors seek. With many trading systems benefiting from volatility, stocks with a high degree of uncertainty can be especially valuable.
You only have to look at stocks such as Origin Energy Limited (ASX: ORG), QBE Insurance Group (ASX: QBE) JB Hi-Fi Limited (ASX: JBH) and Rio Tinto Limited (ASX: RIO) where uncertainty has clouded their future and each has seen its share price fall significantly in the past year.
It's essential to avoid trying to meet these quick traders head-on. View buying and selling stocks the same way you would a transaction involving your car or your home — something you'll want to do from time to time, but not something you could afford to do day in and day out.
Why you don't have to play
Buy-and-hold isn't the same thing as buy-and-ignore, so you shouldn't feel like the only way to win against the market is never to change your mind about a stock. But you have to pay attention to the right information — not falling prey to emotionally driven decision-making but instead focusing on the fundamental factors that affect a stock, an industry, or even an entire economy over time. That's your best way to filter out the noise and take action with things that truly matter.
The key takeaway from the proclaimed death of buy-and-hold is that the mass of investors have given up on what has traditionally been an extremely successful way to make money in the market. That leaves the field wide open for those who measure performance in market-cycles rather than months or milliseconds.
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Motley Fool contributor Mike King owns shares in QBE & JB Hi-Fi. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Dan Caplinger, originally appeared on fool.com