Buy and Hold Carries Risk

In 2013, after a rapid climb to glory, the world of cryptocurrency was rocked by its first major downturn. The internet lit up with chatter from largely millennial investors trying to decide what to do with their newfound, but rapidly shrinking wealth. On December 18th, in the midst of the social media back-and-forth, a poster by the name of GameKyuubi, wrote regarding his crypto positions, "I AM HODLING." He explained that since he was not as smart as professional investors, the only logical course was to not sell into a market that he did not understand. His rambling post was filled with many other spelling errors but the one that immediately became an internet sensation was the misspelled word, HODL.

The expression is common today in online chats and has even made its way into a couple of movies. Posters use it to encourage others to hold a stock “forever” in order to not be out traded by the smarter or more connected elites of Wall Street. When the Gamestop frenzy hit the markets earlier this year, online chat rooms were filled with investors encouraging each other to HODL, “all the way to the moon” if necessary.

It sounds similar to the traditional “Buy and Hold” philosophy but HODL goes further. It has become almost a modern-day battle cry among Wall Streets’ newer investors in their battle against the establishment, as was the case with Gamestop. The strategy is in some ways considered honorable, and a sign of loyalty to fellow investors that one is willing to buy a position and hold it regardless of what happens.

I admire the commitment of millennial investors, and their loyalty to one another. I also respect that sometimes it can be very profitable to buy and hold through the tough times. But I also feel compelled to share a little market history lest they get so carried away in the HODL mentality, that they put their financial future at risk.

The most commonly used measure of market activity is the Dow Jones industrial average. Created nearly 125 years ago, it was designed to contain the largest and most recognized businesses that represented the direction of the country’s stock market. The initial members would have been the strongest of the strong.

Today, none of the original Dow members remain in the index. The final one to drop off was General Electric in 2018. The message is simple. Capitalism provides the opportunity for great ideas to turn into great companies. But it also allows for those businesses to be replaced when even greater ideas come along.

Buy and hold (or HODL) strategies have value, but they also carry risk. This is clear if you look at the great companies of today and realize how young most of them are. Likewise, many of today’s most recognized brands will not exist in future generations. Investors who HODL just for the sake of HODLING may one day find themselves left out when the next great idea comes along.