Does Buy and Hold Now Require a Floor?

The Wall Street Journal recently published an interview (see the video below) with entrepreneur and Dallas Mavericks owner Mark Cuban.

The interview is interesting for a number of reasons.  Cuban talks about investing his own money and he offers some suggestions for regular, non high net worth investors. 

In a nutshell, Cuban strongly believes that the “buy and hold” approach to investing is a worthless strategy.

Buy and hold is a tenet of conventional investing wisdom that advocates steadfastly holding onto one’s investments through all manner of market volatility.  Warren Buffett is a buy and hold investor as his preferred holding period for the securities in the Berkshire Hathaway portfolio is “forever.” 

The reality for most investors is that market volatility makes buy and hold investing very difficult.  It’s extremely difficult to weather the emotional stress that results from the huge market drops (think 50 percent in 2008) that seem to be occurring with greater frequency. 

Cuban advocates keeping the majority of one’s money in cash.  His opinion is that this approach: 

  1. Allows investors to be opportunistic and have plenty of “dry powder” to pounce on extremely attractive buying opportunities that surface as a result of market volatility. 
  2. Provides protection against the possibility of permanent loss of capital (again, think of those who reacted and booked losses in 2008). 
  3. Last and not least, allows an investor to sleep well at night. 

I would tend to agree that points 2 and 3 make some sense for the average retail investor.  

However, I think that the first point is more relevant to investors like Cuban who have time, resources, business skills, and quite honestly, deal flow that enable opportunistic investment decisions. 

The basic risk of the “cash + opportunistic investing” approach advocated by Cuban is that the average investor acts on the cash part but fails to take action on the opportunistic investing part. 

Pure cash is not a good long-term position for people who need to fund their own retirements. 

An alternative to the Cuban strategy is an approach that provides exposure to the potential upside of the market while also providing downside protection (a “floor”).  In other words, have some ability to grow the portfolio when the market grows, but put protections in place that prevent the meaningful losses that can occur in our volatile world—call it a sleep at night strategy that also allows potential for growth. 

For the average investor, variable annuities and fixed indexed annuities fit this “sleep at night + growth” description as well or better than any other financial product.