Greenspan’s reputation – like AIG’s share price – is already in shambles. In fact a move to zero might be an uptick. Warren Buffett, on the other hand, still boasts a rabid following, as well as a few billion dollars in the bank. So let’s weep not for Warren.

Even so, this formerly glistening icon of “buy and hold” has become a bit tarnished. Buffett’s genius, we are now discovering, correlates quite highly with the S&P 500 Index. His genius is not quite as highly correlated with the S&P 500 as, say, Bill Miller’s, the former investment genius at the Legg Mason Value Fund. (For a little background, please click here). But an observable relationship exists, nonetheless.

Your editor would not dare to minimize Buffett’s investment acumen, nor to detract from the man’s considerable financial achievements – that’s Mr. Market’s job. Your editor would only point out that “buy and hold” works brilliantly in rising stock markets, and works particularly brilliantly in the rising stock markets of post-World War II Superpowers in the midst of a once-in-a-lifetime economic boom.

By contrast, “buy and hold” works poorly in falling stock markets, and works particularly poorly in the falling stock markets of pre-Great Depression Superpowers in the midst of a once-in-a-lifetime economic collapse.

We would remind our readers that Warren Buffett, an investment genius, learned his craft at the feet of Benjamin Graham, also an investment genius. Warren Buffett applied Graham’s principles during the greatest economic boom in American history and became a multi-billionaire. Benjamin Graham applied Graham’s principles during the greatest economic disaster in American history and became bankrupt.

Look behind almost any investment genius, dear investor, and you would be likely to find one or two coins that came up heads. That’s why your editors here at the Rude Awakening tend to distrust genius, especially their own. But they do trust the potential for adverse outcomes…and therefore, attempt to make money by not losing it. We have never been fans of buy-and-hold, even when it appeared to be working during the last 15 years.

Buy-and-hold worked well for most Japanese investors until 1989, when the Nikkei reached its all-time high. Since then, however, buy-and-hold has produced a loss of 81% – that’s a return of MINUS 8% per year…for 20 years!.

Buy-and-hold also worked quite nicely for Warren Buffett, at least until last September. Since then, this tactic has produced less than optimal results. Berkshire Hathaway’s stock has lost more than half its value since then. But more to the point, the stocks that Berkshire Hathaway owns have also tumbled in value.

In fact, according to blogger Jeff Matthews, Buffett’s massive investment portfolio, accumulated over more than two decades, is nursing a loss. That’s right, Buffett is posting a “down number.”

Publicly, Buffett claims not to care about the daily [or weekly, or monthly, or yearly, or decadely] fluctuations of Berkshire’s investment portfolio. “The market value of the bonds and stocks that we continue to hold suffered a significant decline along with the general market,” writes the Oracle of Omaha in this year’s annual letter to shareholders. “This does not bother Charlie and me.”

Ummm…right. We would guess that Buffett, in private, might be a wee bit annoyed that his net worth just dropped by more than $34 billion.

Not so, says he!

“We enjoy such price declines,” Buffett claims, “[assuming] we have funds available to increase our positions. Long ago, Ben Graham taught me that ‘Price is what you pay; value is what you get.’”

Cute phrase. Marginally delusional.

Value is a moving target, determined by millions of investors in dozens of countries. Furthermore, value is influenced by booms, busts, wars and government caprice. Admittedly, share prices tend to fluctuate more than underlying economic values. But an investor who buys “value” without acute sensitivity to price is an investor who will spend a career behind the counter of McDonald’s. (Or if he’s really, really lucky, such an investor might spend a couple of decades running a legendary mutual fund and THEN working behind the counter of McDonald’s).

But we suppose that Buffet can afford to write such claptrap. By our count, the man’s wealth still totals more than $29 billion – and that’s based solely on the price [not the same thing as “value”] of his Berkshire Hathaway stock. We’d guess he also holds billions of dollars more in assets in the form of houses, cars and cases of Cherry Coke.

So we do not gather here today to weep for Warren Buffett, but rather to mourn the death of “buy and hold.” Which leads us to wonder, what tactic is likely to take its place? What process/strategy will create the next generation of investment geniuses?

Buying low is certainly an important component. But unless you remember to sell high, you’ll never be a genius. Furthermore, it is important to remember that you have to take what the market gives you. And if it only gives you falling stocks, you won’t find too many investment geniuses. Doing nothing at all is sometimes the best course of action. The Oracle himself says as much. “Lethargy bordering on sloth remains the cornerstone of our investment style,” Buffett once remarked. Pity he did not apply a greater dose of lethargy to his recent investment activities. If he had, he might have avoided his woefully ill-timed purchases of ConocoPhillips, General Electric and Goldman Sachs.

Perhaps, therefore, we should begin doing what Buffett SAYS, not what he DOES.

To emphasize the value of lethargy, we would remind our readers that a hypothetical Japanese investor who moved his money into a passbook savings account on January 1, 1990, would have amassed about seven times as much capital as an investor who left his money in the stock market. Closer to home, buying the Vanguard Prime Money Market Fund on any day since June 30, 1995 would have produced a greater return than buying the Vanguard S&P 500 Index Fund.

To be sure, many stocks here in the US and elsewhere are now cheap enough to warrant making some initial buys. And probably, many of the stocks that an investor buys today will be worth holding for many years. But that’s not “buy-and-hold.” That’s “buy and watch out.”

A final point: For those investors who are still resisting the urge to buy anything, may we suggest one sale: Treasury Bonds.

Please check in this week as we examine the parlous state of American public finances, and why the best trade ticket to write on Treasury bonds for the next few years might be the one that says “SELL” at the top.

Source: The Death of “Buy-and-Hold”

David Galland says profit taking by institutional investors has ‘trampled’ metal prices. But the deepening crisis on Wall Street, geopolitical tensions and a traditional September bounce could send gold soaring back towards $1,000 an ounce. David says this could “happen literally almost overnight.”

Here’s a no-brainer long-term investment strategy to stick to: buy and hold resources now.

This from The Daily Reckoning:

As we take a longer view on the precious metals here at Casey Research, I’m not much for commenting on current market gyrations or the various sub-themes that regularly emerge in the blogs.

First and foremost, as to the purported discrepancy between the price of gold on commodities exchanges and that of physical gold, in my view, any real discrepancy would be jumped on by the arbitragers so fast, it might even break the land-sound barrier.

As for the shortage of gold and silver bullion products, we would attribute this to a couple of factors. The first is that there has been some poor planning on the part of the mints. Secondly, the poor planning is likely due to a failure to appreciate how many people are coming to the conclusion that it is better to own at least some precious metals, instead of holding only the unbacked paper of governments.

As for gold’s recent steep fall in the face of the clear signs of physical demand, it seems clear that this was largely caused by gold traders taking profits. At every step up in this bull market, the precious metals have been stuck, for months at a time even, in trading ranges… the bottom of which evokes buying and the top of which triggers selling.

It is always worth keeping in mind that the defining feature of commodities exchanges is the leverage the instruments that trade on these exchanges offer. Consequently, the traders who call those exchanges home are able to marshal considerable juice in their quest for a new Lexus with 16-way driver seat features and custom leather interior.

The salient point is that while those of us who believe in the values offered by gold and silver like to think of them as “substantial” markets, when it comes to futures markets, they are like a gnat on the tail of an elephant. To make the point, consider that the cash value of foreign-currency contracts traded globally each 24-hour period is on the order of $3.2 trillion. By comparison, over the same 24-hour period, on average, $26 billion worth of gold trades hands. For silver, the number is even smaller, just $4.5 billion.

All of which is to say that (a) these are markets that can be “pushed around” by the traders, and (b) when a large number of traders shift into “take profits” mode, the price of the metals can be trampled.

The long and short of it is that range trading will go on for awhile, until something occurs in the psychology of the market that shifts the majority into the long side… at which point the upper end of the trend is decisively broken and the range is reset to a higher level. It is my contention that the top of the range for gold is now $1,000, and we could see it continue to test that level, then fall back, for some time. But really, who can say? It could happen literally almost overnight.

Shifting to a somewhat nearer-term perspective, however, it is worth looking at the chart from Seasons of Gold, the archived article from the April 2006 edition of the International Speculator.

While the chart hasn’t been updated lately, the data used is so long-term – 30 years – that updating it wouldn’t have changed anything by any noticeable amount.

Viewing the chart, it doesn’t take a lot of imagination to assemble a scenario whereby the continued strong investment demand for physical gold meets the traditional strength of the Indian wedding season buying that contributes so much to the historical pick-up in gold prices in September.

Toss in the effective nationalization of Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), putting the U.S. taxpayer as the guarantor of last resort on fully half of the mortgages in the nation…and mix in some of the ripe geopolitical apples now falling from tall trees, or the imminent realization that oil isn’t going back to $50 or that the inflation phenomenon is not temporary, and we could see a big bump in the gold price over the next couple of months.

Time to go long in the futures market? Well, on that topic, all I can say is, tread carefully…and use as little margin as possible just now.

That’s because, as wild as things have been in pretty much all the markets, we haven’t seen anything yet. If there is one thing you can take to the bank, it is that, in the months just ahead, the volatility of virtually all markets is going to go ballistic. For the attentive trader, that can mean big, and repeated, opportunities for profit. But for the casual trader, high volatility can lead to quick loss making.

Sticking to a longer-term perspective – buying and holding and, if resources allow, buying more on the dips – is the way to go.

Source: Whither Gold?