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Does Buy-and-Hold Investing Still Work?

In a recent Wall Street Journal article, David Weidner explained how hedge funds are now driving the market and why that hurts buy-and-hold investors. When looking at the evidence, however, that claim doesn't seem to hold up.

Weidner's main point is that large traders who control the volume are controlling stock prices. He points to General Motors stock as a prime example, as share prices are still trading around $1.50 despite the company being in bankruptcy.

Here's what Weidner wrote: "Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models. Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market."

Weidner continued: "The buy-and-hold guys are still there, but lately they've been less successful than their hedge-fund counterparts."

Whenever I read articles like this, I immediately go to my trusty videotape to see if the author is simply writing noise (which is almost always the case). So here's the evidence on the returns of hedge funds versus the returns of the market, as represented by the S&P 500 Index and the returns of two value indexes. This is for the period 2003-2008.

  • HFRX Global Hedge Fund Index -- -0.7% 0.7%
  • S&P 500 Index -- 2.4%
  • MSCI Value Index -- 3.9%
  • MSCI Small Value Index -- 6.2%
The data speaks for itself. It would be nice if reporters actually took the time to check the historical evidence before writing such stories. But then there would be very little to write about. So actually taking the time to do the research would be akin to committing economic suicide. Then again, I would have much less to write about.