Can you predict the future?

If I believed that, then I obviously wouldn't get it.
Yes, when investing on the stock market, you are taking a risk, with the expectation of a return. Now blindly buying and holding gives you absolutely no guarantees of any sort of profit or loss, even if you buy 500 stocks or whatever (500 is only a small percentage of all of the stocks out there - there is absolutely no guarantee that the stocks you buy will return 7.5% pa in the long term)
The difficulty when you have a very large amount of money, is that (for obvious reasons) you simply cannot expect the same percentage returns as you can with a smaller amount (obviously not too small, or brokerage will eat it up) of money.

I think you need to open your eyes to the full picture. In actuality, buy and hold (with no research) is trend trading, just that it is a big risk (you may lose money for 5+ years) for a small return. In my opinion, blindly buying and holding is just as much of a risk as shorter term trend trading. If risk isn't your thing, then why are you investing in the stock market anyway?

As you said, major trends have minor trends inside them. But instead of just blindly buying and holding, why not buy the stocks which are obviously trending (over a reasonable time frame) as result of an efficient liquid market?

Sure statisically speaking, it is possible that someone may simply be *lucky* on the stock market (obviously akin to winning the lottery - if you have a 1 in 10 million chance of winning and 10 million tickets are sold then it is likely that someone will win), but do you really think someone like Warren Buffett or Jesse Livermore etc were just plain *lucky*?

 

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True. For buy & hold you get the market average, whatever it turns out to be. The yield on a 500-stock portfolio will insignificantly differ from the entire market; their yields will hover around each other over time. Only 30 or so stocks are necessary to approximate the market average; that’s the power of statistics. For example, compare the Dow (30 stocks) vs. S&P 500 vs. Nasdaq (1500 stocks) since 1983. While blindly buying and holding offers no guarantee, it does give you the highest expected return/risk in the stock market if you are not clairvoyant. The reason you don't want to directly trade smaller-cap stocks (like those other than the S&P 500) is because the transaction costs to buy & sell them are higher. The easiest way to blindly buy & hold is to buy an S&P 500 exchange-traded fund like SPY.

This is true with clairvoyance. Absent that, the long term average of a large portfolio will highly likely insignificantly differ from the long term average of a small portfolio, before transaction costs.

It’s not a small return if you can’t do better. It is trend trading (a very long term trend!) but optimizes your return/risk if you have no clairvoyance; so as a trading strategy it deserves its own category.

True, both strategies offer equal risk on average. But I’ve shown that if you have no clairvoyance then short-term trading yields average returns lower than buy & hold, because of the former's higher transaction costs. There are 2 sides to the equation, return and risk.

The best investor maximizes return/risk (return divided by risk). He or she does not just shy away from risk. The best return/risk is a home loan as I pointed out in another thread in this forum. If you invest in the stock market in a non-tax-deferred account before you’ve paid off a mortgage, absent clairvoyance it is highly likely that you’ll retire later than sooner. You can maximize return/risk by increasing return or lowering risk. Buy & hold per se does not lower risk. It increases return by lowering transaction costs. Diversification lowers risk. It’s easier to diversify when you need not research the companies to predict their future and instead simply buy a whole lot of them (blindly buy & hold).

Because they are not obviously trending, because the market is efficient. An efficient market does not have obvious trends; rather, it is unpredictable. The trends you see are random (unpredictable) in nature. You may see the same behavior repeated ten times this month, yet there’s only a 50% chance it will occur when you next expect it to.

I specified Buffet as a clairvoyant investor. Even that’s arguable because he often buys 5+% of a company so he likely gets a seat on the board, from which he can direct the future of the company. A smart businessperson can definitely exceed the market average whereas a smart investor needs clairvoyance. Keep in mind that Buffet is close to a buy & hold investor. He typically holds his stocks for several years at least. And because he buys in volume he gets much lower transaction costs than you or I could. When transaction costs are zero you can be as short-term as you want; it won’t hurt you then.

 

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