Buy and hold investors are sometimes regarded as a careless bunch as they just pick a quality stock with the assumption that it will rise over time. In fact, effective buy-and-hold investors know that the numbers must be filtered carefully in order to get useful and precise data. Price has a vital role, when used in conjunction with other measures of company growth.
Buy When There is Real Value
During the technology bubble Microsoft’s value was measured more by stock growth than any other parameter. The question is why any sensible buy-and-hold investor would have invested in Microsoft, as at that time, it looked overvalued and the philosophy for this strategy dictates that value is the key measure when deciding the right level to buy in at. Another common misconception about buy-and-hold investors is their inability to effectively utilize price fluctuations. In reality, this kind of investor will always take a look at a stock when its price is falling in order to look for a bargain.
Sell or not
Probably the biggest myth around buy-and-hold investors is that they are never willing to sell. There are always examples of those who never sell, or passive investors who do not trade much on the market. But assuming that investors would never sell a bad position is a gross underestimation of their trading ability. Every investor gets into the stock market for one reason, to make profit and while investors may get attached to a stock they have held for a long time, most see sense and will dump a position if its future performance looks doubtful.
Make a portfolio
Another key factor for buy and hold investors is that, in general, they do not put all of their eggs in one basket. The losses on Microsoft after the stock came back down to earth was a hard hit for many but it did not break the whole strategy. Most buy-and-hold investors try to diversify their investments ensuring that while one may be making a loss there is another that is taking off at the same time.