Author: shyam

The biggest bet that buy and hold investors of a given country are making is that their government stays committed to increase, preserve and protect their citizen’s wealth. It is a combination of regulation, property rights, human capital, investor sentiment and global capital flows.

Buy and hold worked out great for US investors in the last 30-years. Inflation was mostly under control and they enjoyed a dollarized world with the rest of the world sending their surpluses to the US. But It wasn’t always like this.

The year 1980 was a turning point for US bonds and equities. Not that there weren’t hiccups along the way – Black Friday, tech bust, GFC, etc – but it was the beginning of a huge tail-wind that continues to blow even today. Compare the simulation results of pre-1980 equity returns vs. what came next:

The post 1980 data-set is so skewed that when you use the entire data-set – 1964 through 2019 – for running the simulation, you end up with a 0% loss as well.

With this data-set, it is easy to conclude that a buy-the-market “passive” buy-and-hold strategy is superior to everything else. But that would be a very aggressive conclusion to draw.

There are quite a few countries with equity returns (since 1993) in the low single digits: GREECE, CHINA, JORDAN, JAPAN, IRELAND, AUSTRIA, PAKISTAN.

CHINA, a country that grew its GDP in double digits, was a very poor equity investment. And JAPAN was the world’s second largest economy in 1995 but their equities are a joke on twitter.

Only DENMARK, USA and SWITZERLAND had an extremely small chance of posting negative buy-and-hold returns.

Out of the 43 Country specific MSCI indices we analyzed, half had more than a 10% chance of giving negative returns to buy-and-hold investors. India had a 6% chance.

Any analysis done on US stocks should be taken with a pinch of salt. The rest of the world does not work that way.

This post expands on an earlier one on the same topic.

Social science research is said to have a WAGS problem. Most of their research is based on White American Graduate Students and fail to replicate in the real world.

Finance has a similar problem where, thanks to the depth of the data available on the US markets, most investment research is based on American data.

And US data clearly demonstrates the superiority of Buy and Hold. Over a 25+ year period, the probability of ending up with a loss is less than 0.1%

If future returns are in the same vein as their past returns, US investors would be fools not to buy and hold forever.

However, this does not mean that the rest of the world should do the same thing. Every market is different. The Japanese experience is a study in contrast.

The probability of a negative outcome is a whopping 21% for them. i.e., there is a one-in-five chance that investors will not make any money investing in Japanese equities. If past is indeed prelude.

Indian investors have been better off than their Japanese counterparts. There is only a 6% chance of not making any money investing in Indian equities.

All this goes to show that the US is a statistical outlier. “Buy and Hold” working in the US is an outlier. In every other market, there is a non-trivial chance that you will not make any money buying-and-holding equities.

When you look at research based on US markets, keep in mind that the probability distribution of returns that it is based on are an outlier. Anything that is long US equities will “look good.”

All investing is forecasting. And these probabilities will change – we are talking about equity markets after all. But know this before you adopt the “buy and hold” mantra.