Buy and Hold or Buy and Hedge – Which Do You Prefer?

May 11, 2012 / Karen Smith

I heard something on CNBC yesterday morning that compelled me to write this blog today. Steve Ratner, former U.S. Treasury Auto Advisor, was part of a panel reviewing the hype/excitement over the Facebook IPO. Steve is quoted during this interview as saying, “Individual investors shouldn’t be playing the stock market any more than you should take out your own appendix”.

He went on to explain that he feels that we as investors are unable to take information about the companies we wish to invest in, do thorough analysis and come to a reasonable expectation for share performance going forward. He feels that investors should be in market index funds only.

Really?!! I was astounded and dismayed at Mr. Ratner’s patronizing dismissal of an entire community of stock market investors. We know the returns on index funds over the past ten years have been less than stellar. Ten years ago, shares of the SPY, the ETF that tracks movement of the S&P 500 index, were trading at just under $110/share. Today, these same shares are $136.19/share representing an absolute return of 26% – just 2.6% per year. To say that we as the “small guys” in the market could not have outperformed this metric by finding excellent buying opportunities is ludicrous. What if, as an individual investor, I had purchased shares of Apple (AAPL) ten years ago at $10/share and held them through the crisis and rebound in the market? AAPL is trading at just over $570/share, representing a 10 year return of 5600%. How about Starbucks (SBUX) over the same time period? I could have purchased shares 10 years ago at around $11/share. Trading today at $55, that represents a 400% return or 40%/year. Just a little better?!!

The real question is whether we as investors would have the “stomach” to hang onto those shares during the 2008/2009 time frame when it appeared that we were in a financial armageddon in our markets. If we were fortunate enough to be graduates of the Options Animal program, we would not have needed inordinate bravery to withstand that time frame. Our knowledge of utilizing options to protect our investment in those shares, as well as ways to profit from that selloff, would have enabled us to hang on and reap the rewards that have followed.

Perhaps Mr. Ratner is correct about a long-term “buy and hold” strategy in many equities. I know that he is definitely wrong if the individual investor understands a “buy and hedge” strategy. Thanks to OptionsANIMAL, I am proving Mr. Ratner wrong on a daily basis – and loving it!

Karen Smith
OptionsANIMAL Instructor