The Problem With The Buy and Hold Strategy Versus When IVs Increase

Table of Contents: Select a Link to be Taken to That Section

Executive Summary

A buy and hold strategy is widely proposed as a good investment strategy.
We found something interesting when reviewing stock gains.

Introduction

We found something interesting regarding when the gains occur with investment vehicles (stocks, ETFs, etc..) that impact the logic of the buy and hold strategy.

*Note

This article is only part of our internal analysis of investing and communicates with people we know. We are not writing this to attract investors, and we are not giving investment advice. This is just a convenient way to document our analysis, which can be easily shared and easily updated.

We begin this article by reviewing a previous section from an article on a method of technical analysis called the MACD or moving average convergence divergence.

Test #3: Considering the Differences in the Signal and Level Versus the Long Term Price Rise of the IV

One can often find a small difference between the signal and level, with the level crossing or above the signal, but when the price has increased to be very out of line with the historical level. MACD will not care about the long-term history, because it only looks at the last 26 periods and the last 12 periods as a moving average. However, this means MACD can put investors into IVs that are very high versus their history, and this means the IV has the potential to quickly reverse. We have seen this on a number of occasions with very low-priced stocks, that trade for several dollars. This gets to another topic which is the number of periods used. As I just said, 26 periods and 12 periods is the most common number of periods and are considered the default. However, the shorter the number of periods the more “jerky” or responsive the buy and sell signal. Therefore, if one wants a more responsive MACD, then shortening this default makes sense, and of course, the converse is also true.

The Topic of Trading Frequency

At the time that we wrote the above paragraph, we had not yet figured out the issue of how long different IVs show gains versus the entirety of the time the IV exists as an investable item.

When performing an analysis of various IVs, we categorized three different movements.

Increase
Stability
Decline

However, we found that the IVs we looked at only was in an increasing phase for a short period of time.

Test #1: Symbol XME

Let us take one IV with the symbol XME we reviewed.

From Dec 2007 Increases in the IV were the following.

From Dec 7 2007 to June 8 2008 (6 MO)
From July 27 2009 to Jan 10 2010 (5.5 MO)
From Nov 29 2010 to Mar 11 2012 (3.5 MO)
From Feb 16 2016 to Aug 01 2016 (8.5 MO)
From Jan 02 2018 to Jan 22 2018 (.5 MO)
From July 13 2020 to Apr 26 2021 (8.5 MO)
From Feb 22 2022 to Mar 22 2022 (1 MO)

This totals 6 + 5.5 + 3.5 + 8.5 + .5 + 8.5 + 1 = 33.5 MO

However, the total number of months from Dec 2007 to Mar 2022 was 15 * 12 = 180 months.

This means that 33.5/180 = 18.6% of the time represented virtually all of the gains for this stock. The other 81.4% of the time, the IV was either stable or declining.

Test #2: Symbol WEAT

Our second test was for the symbol WEAT.

From June 12 2012 to July 09 2012 (1 MO)
From April 07 2014 to April 28 2014 (.75 MO)
From October 20 2020 to March 08 2021 (4.5 MO)
From Jan 18 2022 to March 14 2022 (2 MO)

1 + .75 + 4.5 + 2 = 8.25 MO

We estimate there were another 20% of months that the IV increased, but they were so small in time we did not measure them. So 8.35 * 1.2 = 9.9 MO.

June 12 2012 to March 14 2022 is 117 MO. 9.9/117 = 8.4%. Or the increases for WEAT were accounted for by holding the IV for only 8.4% of the time.

Test #3: Symbol TSLA

Our second test was for the symbol TSLA.

From Nov 01 2010 to Nov 15 2010 (.5 MO)
From Jan 13 2013 to Sept 23 2013 (8.5 MO)
From Jan 14 2014 to March 14 2014 (2 MO)
From May 05 2014 to Sept 14 2014 (4.5 MO)
From May 04 2015 to Sept 14 2014 (4.5 MO)
From Jan 17 2017 to Jun 19 2017 (5 MO)
From Oct 14 2019 to Feb 10 2020 (4 MO)
From May 04 2020 to Aug 24 2020 (3.5 MO)
From Nov 16 2020 to Jan 11 2021 (2 MO)

.5 + 8.5 + 2 + 4.5 + 4.5 + 5 + 4 + 3.5 + 2 = 34.5 MO

Nov 01 2020 to March 14 2022 is 136 MO. 34.5/136 = 25%. Or the increases for TLSA were accounted for by holding the IV for only 25% of the time. Of course Telsa has been a very unusual stock, so it has appreciated far more than most other stocks.

This is higher than either Test #1 and Test #2. However, even with a stock like Tesla, it still only paid to hold the IV for 1/4 of the time.

Let us look at an opposite type of IV, which is the commodity of corn. Commodities have been generally declining until very recently.

Test #4: Symbol CORN

Our second test was for the symbol CORN.

From Sept 20 2010 to March 28 2011 (6.25 MO)
From July 02 2012 to Aug 06 2012 (1 MO)
From Sept 08 2020 to May 03 2021 (6 MO)
From Dec 13 2021 to March 28 2022 (3.5 MO)

6.25 + 1 + 6 + 3.5 = 16.75 MO

Sept 20 2010 to March 14 2022 is 138 MO. 16.75/138 = 12%. Or the increases for TLSA were accounted for by holding the IV for only 12% of the time.

Conclusion

With the symbols that we checked, the average amount of time the increases occurred versus the entire time that transpired was 18.6 + 8.4 + 25 + 12 = 16%. Tesla was the highest, and WEAT was the lowest. This is curious and we are do not know how well this is known. With perfect knowledge, an investor could have held these IVs for only 16% of the year in each year, and received virtually all of the increases for these IVs.

The buy and hold strategy is proposed because of the inability to forecast when an IV will go through the three phases of increase, stability, and decline. This means that the buy and hold strategy should be considered a strategy that is employed to keep in the stock to receive these increases that can expect to happen (with these sampled symbols or IVs) around 16% of the time the IV is held.