Peter Lynch: Why Buy-And-Hold Investing Beats Market Timing

Check out this gem from page 23 of Peter Lynch’s classic “One Up On Wall Street” that explains the wisdom of always staying fully invested: “If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch—the thirty days when stocks had their biggest gains—your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward.”

That’s why I can’t really relate to people who want to sell Johnson & Johnson at $92 and repurchase it at $80, or sell Coca-Cola at $40 and repurchase it at $35, or sell Exxon at $100 and repurchase it at $85. We have to get past our natural tendencies to think linearly and keep in mind that stock prices tend to move in fits and starts, rather than a constant slow-moving slope upward.

Think of it like this: in a good year between 1926 and 2006, the Dow Jones advanced about 10% on average in a given year. There have been seven days in American history when you have gotten more than a year’s worth of return on a single day. On March 15th, 1933, the Dow Jones went up 15.34%. On October 6th, 1931, it went up 14.87%. On the day before Halloween in 1929, the Dow Jones saw a 12.34%. On September 21st, 1932, the Dow shot up 11.36%. And then there are the more recent examples: on October 13th, 2008, the Dow advanced 11.08%. Two weeks later on October 28th, the Dow went up 10.88%. And, then, on October 21st, 1987, the Dow increased 10.15%. On a percentage point basis, those days alone covered my ground than entire years.

A 10% long-term annual gain is not achieved at a steady clip of 0.83% per month. The best days tend to be concentrated as the Lynch example above demonstrated. That’s why market timing doesn’t work. No one rings on a bell on the morning of October 28th, 2008 to tell you, “Hey, you better be in the stock market today, because it is going to go up more than 10%.”  That’s why buy-and-hold investing is an important advantage over a market timing strategy: the best days in the stock market’s history have come in concentrated spurts that even in hindsight does not reveal a predictive pattern, and it can be weird for people to appreciate the fact that almost 80% of the stock market’s gains from 1926 through 2006 have come from 426 days of stock market trading. Almost a century boiled down to a little more than a calendar year.