Business, Legal & Accounting Glossary
Buy and hold is an investing philosophy that believes in buying excellent companies and holding those investments for the long term.
Buy and hold is an investing strategy designed to minimize transaction costs while maximizing the possibility of enjoying the long-term returns generated from a given business.
Since long-term stock appreciation is based on the long-term growth of the underlying business, buy and hold investing would, rather than buying based on a stock prices, technical charts, or momentum, buy stocks representing strong, stable companies with excellent future prospects. Although criteria for the latter differ, many buy-and-hold investors agree that a good buy-and-hold company will have excellent and shareholder-friendly management, little or no debt, significant free cash flow, and a substantial competitive advantage.
Because transaction costs, including trading fees and capital gains taxes, can significantly undermine an investor’s long-term returns, the buy and hold strategy has the advantage of minimizing these costs.
Buy and hold investing often overlaps value investing, seeking to buy quality companies at a discount to their intrinsic value. This discount provides a margin of safety that protects the investor on the downside while capitalizing on the market’s eventual recognition of the company’s fair value.
Although, as famous buy-and-hold investor Warren Buffett has said, “Our favorite holding period is forever,” buy-and-hold does not imply that a stock should never be sold. Rather, stocks should be sold whenever 1) their stock price has significantly exceeded a reasonable calculation of the company’s intrinsic value; 2) the investor can no longer trust management to produce the long-term growth buy and hold depends on; or 3) a significantly better opportunity for investment exists.
Buy-and-hold investing is a form of passive investing in which an investor acquires a portfolio of securities and holds them more or less permanently. Except for the original purchase—and the possible final liquidation—of securities, the portfolio is not traded. Income from the securities may be spent by the investor—a typical scenario for retirees living off income from investments—or reinvested in the portfolio to accumulate capital.
Buy-and-hold investing is generally associated with equities, which never mature. The term can reasonably be applied to long-dated fixed income investing, with proceeds from maturing bonds reinvested in the portfolio.
Unlike index fund investing, which requires an investment manager to sponsor some form of pooled investment vehicle, buy-and-hold investing can, and typically is, conducted by investors on their own behalf’s. In that case, there are no investment management fees to pay. That, combined with an absence of turnover, renders buy-and-hold investing less costly than all but the best of index funds.
For taxable investors, buy-and-hold investing tends to outperform index investing after-tax because buy-and-hold portfolios are more effective for deferring capital gains. A disadvantage of buy-and-hold investing is the fact that portfolios tend to be less diversified than those of index funds, although large buy-and-hold portfolios could easily hold several hundred securities.
Buy and hold investing is practiced by astute retail investors but not typically by institutional investors. This is unfortunate because the strategy is excellent. Institutional investors who did use buy-and-hold investing would have little need for investment consultants, which is likely why those investment consultants aren’t recommending it.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Buy And Hold are sourced/syndicated and enhanced from:
This glossary post was last updated: 28th December, 2021 | 0 Views.