6 Reasons why Buy-and-Hold works.

Warren Buffett recently crowned to the richest man of the world, has a simple strategy he buys stocks of very conservative companies like Coka Cola, Gillette or American Express and never sells them again. But why is this such a good strategy here are 6 reasons which speak for it.

1. The markets are irrational and unforeseeable. Jeremy Siegel an economist of the Wharton School of Finance and author of “Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long Term Investment Strategies”, once assayed the 120 most volatile days in the history of the stock market. He came to the conclusion that just 30 days had reasons for this extreme swings. In other words 75 % of the biggest turnarounds in the history of the Wall Street had been completely irrational. So forget market-timing you are stupid if you try to suggest unforeseen events.

2. The more you trade,the less you earn. During the years of 1991 till 1997 Terry Odean and Brad Barber, both professors of behavioral theory of the University of California in Davis, investigated portfolios of 66.400 Merrill-Lynch-Investors. The professors concluded that there are two conclusive facts which cut down the profits of investors. The first are wrong decisions in stock picking and the second transactions charges. And look both facts were boasted by active traders so that they averagely earned 7 % less than the long term investors.

3. Odean and Barber also proved that investors who changed from offline- to online-trading lost more money. Before they were online they bashed the market with 2 %, however after they were online their earnings felled 3 % below the market. Isn´t this the best proof that more trading cuts down your profits? By the way Joe Ricketts the founder of Ameritrade one of the biggest online-broker once said: “The best thing an investor can do is to buy a good company and to hold it.

4. Investors buy to a high price and sell to a deep - and they loose at the high and in the deep. That´s true this is the conclusion of a morning-star-study. The most investors of investment-fonds have a very bad market-timing they buy in a high and sell in a low. The greed is at fold for this attitude because it causes a buy-hysteria and the most investors enter the market when it´s too late for it.

5. We are too confiding and loose. We deny and gloss over losses. Not a long time ago a study of the magazine Money was published which said that 88 % of all investors experience a phenomenon, which is named a propensity to optimism or an overreaching confidence by psychologists. For that reason we often make wrong investment decisions, take too much risk on us and loose and then we pretend that there is no problem. More than the half of the investors with an exaggerated opinion of themselves really believed they would beat the market but in reality they lay between 5 and 15 % below it.

6. Unfortunately even successful traders don´t earn very much. Many People believe professional trading is a way to get rich very fast. But is that really true? Definitely not that´s what many studies have proofed, professional trading requires a very high level of concentration when you what to trade for your job you have to give up your normal one.