Buy and hold, or actively manage as times change?

I have always been fascinated by the concept of human perception, especially when it comes to the selective decision-making process of what to remember and what not. As a young man, I fell in love with the Alfa GT Junior sportscar. To me, there was no car more beautiful than that little red monster. It didn’t matter to me that technology, luxury and handling had improved over the years, I believed that if you were lucky enough to find one of these beauties, it would be the last car you own. About 15 years later, I finally managed to buy a 1976 model and I could hardly contain my excitement as I waited for the arrival of my new toy. Make no mistake, I enjoyed this car immensely, but what I imagined I would be driving, and what I actually ended up driving, were two very different cars. Compared to modern cars, the 1976 Alfa was a bumpy ride, it was uncomfortable and, in many ways, highly impractical.

When you ask Warren Buffett, one of the most successful investors of our time, what his favourite holding period is for a share that he has bought, his answer will be, “forever”. So, if Warren Buffett follows a buy and hold strategy, then surely, much like the Alfa sportscar in 1976, it should be the best strategy? Many investors tend to forget that as time goes by and the world out there changes, our investment environment also changes. Just take a look at Buffett’s own company portfolio (Berkshire Hathaway) of 25 years ago. You will see that all investments above $1 billion (out of their total portfolio value of $22 billion) comprised a total of only seven companies. Of these seven companies, they still own four, while the other three have since been sold.

The most famous of these had to be their 9% shareholding in Freddie Mac. Although Freddie Mac only started experiencing financial difficulties in 2008, in 1999 Buffett was already concerned about the risks the company faced to achieve their earnings forecasts, and he sold his entire stake.

Back on local soil, I regularly attend consultations and presentations where investors and even experts, recommend that investors should simply “buy the 10 largest locally listed shares and keep them”. These 10 shares make up 60% of the total market, and more importantly, there is a reason why they have become the 10 largest shares. How can you go wrong? I’m not saying that the 10 largest shares are in any way poor choices at all, but you need to keep in mind that just because my Alfa GT Junior was the best car on the market in 1976, definitely does not mean that it still is today.

If you had followed a buy and hold strategy at the turn of the millennium, Dimension Data and/or Datatec surely would have been part of your portfolio. Both shares initially provided excellent portfolio growth, only for Didata’s share price to tumble from R75 per share in 2000, to below R2 in 2003, while Datatec saw its price drop from R146 per share in 2000 to below R4 in 2008.

Many investors would be eager to point out that this refers to the bursting of the Dotcom bubble, and that it’s unlikely to be repeated, although I think that’s highly debatable.

When we turn back the clock to 15 years ago (May 2005) without considering any significant occurrences, you will see that there was no sign of Naspers in the top 10 largest shares listed on the FTSE/JSE Top 40 Index, although all 10 of those shares still find themselves in the Top40 Index today. It is therefore safe to say that none of those 10 shares were bad shares. Secondly, and more importantly, 45% of the Top40 Index consisted of resource shares. Today, 15 years down the line, this weighting stands at 30%. The reality is that if you had followed a buy and hold strategy in 2005, roughly 50% of your portfolio would have been invested in resource shares.

Graph 1: FTSE/JSE All Share Index vs top 10 buy and hold shares since 2005 (source: PSG Wealth Old Oak & Iress)

If you had invested R100 each in the FTSE/JSE All Share Index, and a portfolio consisting of the top 10 largest shares on the local market 15 years ago, your R100 investment in the JSE would have been worth R375 today (4 May 2020), while your buy and hold strategy investment would have been worth only R230.

Don’t just assume that a buy and hold strategy is the best strategy to follow under all circumstances. The world is constantly changing, so make sure that your personal investment portfolio keeps up with those changes.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

 

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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