Buy and hold, or stay active as times change?

I find the concept of human perception incredibly fascinating, especially when it comes to the selective decision-making process of what to remember and what not.

As a young man, I fell in love with the Alfa GT Junior sportscar. For me, there was nothing more beautiful than those little red monsters. The fact that technology had advanced along with luxury and handling didn’t matter to me.

In my mind, the Alfa GT Junior would be the last car you own if you were lucky enough to own one. Roughly 10 years ago, my dream came true and I was able to buy myself a 1976 model.

I will never forget how excited I was for the arrival of my new toy. Make no mistake, I loved the car, but the way I pictured it in my mind compared to the car I actually finally got to drive, were two very different things.

When compared to modern cars, the Alfa was bumpy, uncomfortable and in many ways, very impractical.

When you ask one of the most successful investors of all time, Warren Buffett, which term is his favourite when it comes to holding a share he bought, his answer will be, “forever”.

If this is the way he sees it, then surely, as was the case with the Alfa in 1976, it has to be the best strategy?

What many people forget, however, is that as time goes by and the world changes, so too the investment environment changes.

When we take a look at the very same Buffett’s Berkshire Hathaway portfolio, you will see that all of their investments, exceeding $750m, consist of six companies. Of these six companies, they still own four, while the other two have been sold. Of these two, the most famous surely has to be Freddie Mac.

Although Freddie Mac only ran into financial trouble in 2008, Buffett already started to feel uneasy about the amount of risk the company faced in order to achieve their earnings expectations in 1999, and ended up selling his entire shareholding.

Getting back to the local landscape, I regularly find myself in consultations and presentations where investors and even experts recommend that you buy the 10 largest local shares and keep them. These 10 shares make up a massive 60% of the total market and more importantly, there is a reason why they became as big as they did.

So how can we go wrong with this recommendation?

Don’t get me wrong, I’m not saying that the 10 largest shares on the JSE are bad shares in any way, but I will say again that times change, and the fact that my Alfa may have been one of the best cars on the market in 1976, definitely doesn’t mean that it still is today.

Had you followed a buy-and-hold strategy at the turn of the millennium, Dimension Data and/or Datatec almost certainly would have formed part of your portfolio. Both shares delivered excellent growth, only for Didata’s share price to fall from R75 per share in 2000 to below R2 per share in 2003, while Datatec fell from R146 per share in 2000 to below R4 per share in 2008.

Many will attribute those losses to the bursting of the dot-com bubble – a black swan event (something that defies expectations completely) that will probably never happen again, although I think that remains debatable.

Turning back the clock 10 and 15 years respectively – and with no particular reference to any newsworthy events – you will note that in neither instance did Naspers feature among the top 10 largest shares listed on the FTSE/JSE All Share Index.

More importantly, six of the top 10 shares in 2002, and five of the top 10 shares as recently as in 2007, still consisted of today’s very unattractive resources sector shares. So, if you had followed a buy-and-hold strategy in 2002 and 2007, you most probably would have invested around 50% of your portfolio in resources shares.

If you had invested R100 in each of the FTSE/JSE All Share Index and the Top 10 shares on the JSE 15 years ago, your FTSE/JSE R100 would be worth R487 as at the end of 2016, while your Top 10 R100 bill would be worth only R350.

Don’t simply accept that a buy-and-hold strategy is always the best strategy. The world is changing constantly – it’s important to ensure that your personal investment portfolio keeps up. 

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 22 June edition of finweek. Buy and download the magazine here.