Several members have contacted me recently to ask about the timing of my Hold and Buy ratings. Specifically, these long-term investors want to know why I sometimes put good stocks on Hold at low prices and then switch them to Buy once they start going up. Isn’t that the opposite of “Buy Low, Sell High?”
In light of these questions, I want to clarify a few things about our Hold and Buy ratings. First, unless otherwise stated in the recommendation, a Hold means just what it says: Hold the stock. It doesn’t mean the stock is in danger of being sold unless we explicitly say so. Usually it simply means that we think the stock is still a good one to have in your portfolio, but that we don’t think it’s at a good buy point. It may be overextended, or in a downtrend, or other risk factors may be at play.
It’s the second situation—putting a stock on Hold because it’s going down—that sometimes brings out the letters from value investors. If it’s still a good stock to own, shouldn’t it be an even stronger Buy when it’s cheaper?
In one sense, yes, and we’ll get to that. However, when a stock is declining (more than usual, I don’t put a stock on Hold simply because of normal volatility), the fact is that it’s more likely than usual to keep declining. And I’ve learned that investors don’t like it when something goes down right after they buy it—understandably.
Would it be smarter to keep the stock on Buy throughout an anticipated correction, giving some investors the opportunity to buy the stock at a discount? Possibly, but you know what they say about buying at the bottom and selling at the top: only liars do it consistently. Far more likely is that buyers who bought during a correction and immediately lost money would become discouraged and sell near the bottom.
I’ll also sometimes switch recommendations to Hold when short-term risk rises for another reason, like a market downturn or Fed activity, for the same reason.
As the value investors who write in correctly point out, these rating changes don’t really impact the picture for long-term investors. So if you really don’t care what the stock does in the short-term, you can still buy some of the positions that are put on Hold for one of these reasons. But be careful! Some Hold ratings do mean that the longer-term picture is becoming muddled as well. I always make this distinction clear by explaining the reason for a change to the Hold rating in the write-up.
Lastly, another question I get fairly often concerns Buy ratings: should you still buy a stock several months after it’s been added to our portfolio? The answer is simple: if it’s still rated Buy, go ahead. Stocks frequently trade higher before consolidating for a second move higher. This is even truer on longer time scales.
It’s hard but important to suppress the human instinct that says it’s “too late” to buy a stock that’s already had a good run. Yet trends tend to last longer and go further than anyone expects, so buying a stock that’s going up is exactly what you should be doing.
That said, buying on pullbacks (using buy orders or options, or simply by watching) is a great way to get into an uptrending stock at a better price, and can usually be accomplished without too much difficulty in a market as volatile as this one.
As with Hold ratings, I will often say something in the commentary about a Buy-rated stock that’s important, like suggesting you wait for a pullback in a stock that’s looking overheated short-term. So don’t go out and load up on everything with Buy ratings, or dump everything with Hold ratings: read the advice, and treat each investment individually. And remember, make sure to maintain appropriate position sizes based on your risk tolerance and portfolio management preferences.
*This post has been updated from a previously published version.