Why Buy & Hold Is a More Dynamic Strategy Than You Think

As geopolitical tensions and stock market volatility have risen recently, we’ve been getting more questions about how to manage portfolios and respond. Our answer, as always, is: “Stop trying so hard to do something.”

AWARE’s philosophy of making long-term investments in a small number of companies comes from the belief that this is the most rational way for individual investors to invest. Top-tier Wall Street hedge funds won’t even take individual accounts under 10 billion KRW (about 10 million USD), and individuals have a powerful edge in the form of time and patience.

Coincidentally, Capital Gains recently ran an article on the surprising difficulty and dynamism of the Buy & Hold strategy. We’ve translated and are sharing it here.

If you had invested $10,000 in Netflix (NFLX) at its IPO in 2002, that stake would be worth about $8.2 million today—assuming you didn’t sell any along the way. That second assumption is far harder to satisfy than the first. Over the past year, Netflix’s cumulative trading volume has been nearly twice the current shares outstanding. In other words, the average holding period for a share of Netflix was only about six months. Of course, you have to account for the ultra-short-term positions of market makers and short-term traders, but even long-term investors frequently change their positions within a decade.

This naturally raises the question of what exactly long-only asset managers who invest in a handful of stocks for the very long term are doing in exchange for their fees. Some funds run extremely concentrated portfolios, sometimes with fewer than ten holdings, and when you look at their 13F filings, changes in assets under management (AUM) stand out more than changes in portfolio composition. What is it that they actually do?

The advertising industry offers a useful analogy. The legendary CEO of a certain cosmetics company (likely Helena Rubinstein) once complained to their ad agency: “We’re paying you a fortune, but you keep running the same ad over and over.” The agency’s CEO (probably David Ogilvy) called in everyone working on that brand and replied: “You’re not paying us to create new ads that might not work. You’re paying us to keep running the ad that’s already proven to work.”

Investing involves a similar psychology. When an existing strategy is working well, it’s hard to change it even if the environment shifts. At the same time, loss aversion makes it psychologically difficult to simply stick with the current strategy. By 2011, Netflix’s cumulative return had reached 3,400%, but when its attempt to split the DVD rental and streaming businesses failed, that figure dropped to 800% in just a few months. If a company has invested heavily in fixed costs and is amortizing them over time, its customer base needs to keep growing. If customer numbers suddenly fall and consumer complaints surge, it’s not hard to imagine a scenario where the stock goes to zero.

What long-horizon investors do in exchange for their management fees—often extremely well—is to build enough conviction in the companies they own to run a portfolio of, say, just five high-beta names that are highly sensitive to the market. This is not easy. The numbers tell one story, but there is always a second, more complex story on the qualitative side. The role of a long-term investor is ultimately to keep testing whether the company’s financial statements still match reality.

One reason ultra-long-term investing is hard is that, from a CEO’s perspective, these investors are extremely welcome shareholders. They’re unlikely to turn into activist investors who pressure management (they’re more likely to just sell and walk away), they don’t need the business model explained to them from scratch, and they’re likely to stick around for a meaningful period of time. They also don’t waste management’s time with endless, pointless questions about short-term earnings guidance the way some sell-side analysts do. But even these investors eventually leave, and that can pose a major risk for management. It may not mean much if a hedge fund like Balyasny sells out of a name, but if a concentrated long-term fund exits a position, that’s a far stronger signal. Because such funds often invest precisely because they agree with management’s vision and strategy, when they decide to sell, 1) it’s likely to be communicated to the market in advance, and 2) it’s likely to be driven by management’s own actions or failures.

Over a long holding period, companies change—especially the very best ones. Someone who has held Netflix from its IPO to today has, at different times, owned a DVD rental company, then a loss-making content distributor, and now a multilingual content studio with a global streaming distribution network.

For this reason, one common criticism of concentrated long-term investing is less persuasive than it seems. Suppose two strategies deliver the same returns and we ignore taxes. The better strategy, the argument goes, is the one that trades more, because a larger sample size makes it statistically easier to identify superior approaches. It’s true that low-turnover funds have fewer investment data points. But over long holding periods, the underlying businesses themselves evolve, and the portfolio naturally becomes more diversified. In other words, long-term investing is not just a one-time buy; it is the cumulative result of repeatedly deciding to keep holding.