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June 25, 2010
Buy and Hold Investing
Buy and hold investing can be an effective means of profiting from the stock market. However, to succeed at buy and hold investing it is necessary to follow several principles, including some commonly used by the day trader. Although long term investing avoids the overhead of paying frequent commissions it also misses out on the ability to profit from frequent ups and downs in stocks along the way. Whether one is a trader looking for short term profits or someone only interested in long term value investing it is always profitable to engage in both fundamental and technical analysis of the stock in question. The same technical analysis tools that helped rice traders in ancient Japan make a tidy profit can help the investor of today buy and sell at the most profitable points in buy and hold investing. A caveat for anyone who invests long term is that there is always a time to buy and always a time to sell. Long term investors look for a margin of safety when buying underpriced stocks. When that margin of safety as measured by a price to earnings ratio or the discounted value of all future earnings dwindles it is time to consult Candlestick pattern formations for the most advantageous time to exit the investment.

Many who engage in buy and hold investing are successful individuals who are busy in their profession and do not have the time to follow their investments on a daily basis. Because they do not have the time for daily stock market trading, these individuals also do not develop the skills necessary for successful stock trading. Nevertheless many long term investors have an acute sense of a good long term investment, often obtained from their work, personal, or recreation experiences. A famous fund manager once noted that it was when his wife and teenage daughters dragged him out to the mall is when he discover the Gap. Wondering who ran the store where teenage girls were buying sweaters by the armload led him to make a very profitable investment in this clothing store on its way up to becoming the United States’ largest specialty apparel retailer. Using the Gap as an example we can see how long term investing can be profitable for years but often the profits come to an end and turn to losses unless the investor diligently applies both fundamental analysis and technical analysis to his or her stock market investments.

Like many startup companies with a good idea, competent management and attractive products the Gap grew rapidly for years, giving spectacular profits to its investors. Today the Gap is a strong presence in retail clothing but is under constant pressure from competitors in matters such as supply chain management and other integrated business solutions to maintain profitability. Many mature companies, like the Gap, are still good investments but require continual attention. They are unlikely to grow at a spectacular pace and may become the kind of company that stock traders can profit from following. For those interested in buy and hold investing it is wise to periodically review their stock portfolio to see which stock investment no longer exhibits a margin of safety. At the point the long term investor is well advised to follow the stock price using Candlestick charting techniques and sell stock at an advantageous price.

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