Monday, September 28, 2009

Buy & hold

Occasionally I get into a "discussion" on the buy and hold approach vs. a trading approach. I can assure you that the most profitable approach to a secular bull market, especially one that's getting as deep into the bull as gold is to simply take a position and hold on.

That's how investors get rich during a secular bull. It's how Buffett got rich during the secular bull market in stocks from 1974 to 2000.

However the fear of drawdowns will keep most people out of the investing approach. These people will choose to trade because they can't handle drawdowns.

I will be the first to admit that if you can't stomach drawdowns on your account then you are probably going to have to move into the traders camp.

However avoiding drawdowns isn't the way to get rich. Unfortunately the strategies that produce the biggest gains almost invariably also have the largest drawdowns.

Take a look at the chart of the HUI. Since Apr. (when I started building my mining positions) the Hui is up roughly 35-40% give or take depending on where in Apr. one entered.

A simple buy and hold approach has produced a nonleveraged return of 40%. How many traders can claim a return on their portfolio that large since April? I dare say very very few. (and if they can then they are probably using leverage or very loose risk control. Both of which will eventually turn any account to dust).

By the time this bull is finished a buy and hold strategy will have so vastly outperformed a trading strategy that traders won't even be able to see the investors with a telescope.

Tomorrow I'm going to do a post on the different mind set between smart money professional traders and dumb money retail traders.