“To make money in stocks you must have the vision to see them, the courage to buy them and the patience to hold them.”

This wonderful quote is often attributed to George Fisher Baker, a financier from the 19th Century. After reading the quote, one knows what mental qualities are needed to make money in stocks. But it’s very hard to determine which quality to use at what time.


What is HODL?


If you are even vaguely familiar with cryptocurrencies, or at least the lingo used on social media, one term has come up often. It is ‘HODL’ (hold on for dear life), which is an equivalent of H-O-L-D, and now has become a meme – it sometimes signifies that “ignore the volatility and hold.” It can be about whatever security mentioned in that context.

The concept of ‘holding’ on to a security as the price keeps going up and down is a phenomenon very difficult to understand. We usually read social media forwards about stocks that have outperformed over 20 years or 30 years with comparisons suggesting that if you would have bought the stock instead of some object, you’d be so much richer.

The anxiety of HODL

However, when we see the chart for that stock for the same time period, it seems like a clean move from a low price point to a higher one. If someone bought the stock and was actively tracking the price movement on a daily basis, she did not have the benefit of this long-term view while ‘holding’. There will be a lot of times when the stock price would have fallen dramatically within the short time and did not go anywhere for a long time and then suddenly started moving up in bursts and eventually reached the level where it became a meme.

Consider the following three charts of a very good consumer products business:

Chart 1: From March 2000 to March 2021

CHART 1ET CONTRIBUTORS

(Stock Price Data Source: Google Finance)

The stock movement over 20 years looks pretty impressive when seen from point to point.

Chart 2: From March 2000 to March 2005

CHART 2ET CONTRIBUTORS

(Stock Price Data Source: Google Finance)

However, the first five years of HODL were not very pleasing and equally disturbing was the first 10 years, as seen in Chart No. 3.

Chart 3: From March 2000 to March 2010

CHART 3ET CONTRIBUTORS

(Stock Price Data Source: Google Finance)

This is a long enough time to be deemed as long-term investing.

This may seem like a torture, especially when we can see the business grow in real life and also other stocks do far better than this one. Even the humble bank FD would look a charming investment compared with this kind of return.

After seeing this stock performance, it won’t be wrong to question our judgement if we continue to hold on to it for 10 long years. After all, 10 years is a pretty long time and it would feel really humiliating to be beaten by a generic debt instrument like a bank FD.

Is it possible to HODL forever?

It’s interesting to imagine if someone can truly hold on to a stock that long. There are enough examples around us, from friends and family where we know that someone forgot the physical shares kept in their family safe and discovered them after 20 years to find that the business had now become very big and the shares had become very valuable. There’s also opposite examples where people have discovered they have held on to junk businesses whose share value has gone to zero.

So, it’s technically possible to hold on to something for a long time provided we’ve forgotten that we own it and no one flashes its current price in front of our eyes on a daily basis. We may also have purchased the stock with the intention of holding on to it for a long time, because we are aware that stock returns take a long time to show and we can’t know how long in advance.

Sadly, how we end up buying something is sometimes more important than when we buy it. If we are encouraged to invest in something because everyone is talking about it and we are afraid of missing the bus to make some effortless money, then yes, holding on to something valuable is very difficult.

As our motivation is not connected to how that thing works, but just to profit from it, we will always rely on external opinions for holding on to it. As the price goes up, we will be tempted to feel smart about our investment decision and as the price goes down, we will be equally tempted to feel worse about our luck. These mood swings often make it impossible to HODL.

Who should not HODL forever?

It is equally important to understand under what conditions we should not hold forever. Many people, who invest seriously towards meeting some future goals, usually set aside funds for future expense.

In such a case, if your financial goal is near and you have invested for that particular goal, then holding on to an investment forever might not be suitable. Especially, if there’s no other source of funds to meet that financial goal.

Also, holding on to something when we have borrowed against something is equally hard, if one is not prepared for the price swings.

When HODL works very well?

When something we hold keeps on getting better over time, then doing nothing for a long time is magical. A business whose profits grow, assets grow and the quality of the business doesn’t deteriorate over time can do wonders when held for a long time.

Our ability to understand why we have invested in something becomes very important when we can see it improve over time and that growth becomes somewhat predictable rather than being a fairy tale told to us by someone. We are able to observe this intuitively in the people around us. We can love being around some person for a very long time. Somehow it is hard to do it objectively when evaluating businesses if we are not prepared to devote time and effort towards understanding them.

Why is HODL confusing?

When we look at our reasons to hold on to something, there’s always that aspect of who we are as an investor matters. If someone has been introduced to investing through the school of value investing, where assets that are valued higher than their intrinsic value are deemed expensive, then holding on to it seems like arrogance.

If one is used to the momentum-style of investing, then holding on to something that might be reversing its trend may be considered dangerous. Also, in a portfolio of various assets, one asset class can become disproportionately large in size, as its value grows over time. In that case, it would be tempting to consider reducing our exposure to that asset class.

All of these are legitimate reasons for not wanting to hold on to something. Additionally, there might be a situation where something doesn’t move up in value for a long time, as we saw in the above stock charts. In that case, it might be tempting to question our own judgement for wanting to hold on.

There’s no easy answers, at least nothing as easy as BUY or SELL. Holding on to something good is perhaps the most difficult decision an investor has to make. In investing, doing nothing sometimes requires the maximum amount of mental effort. We need so many things, like:

  • Patience
  • Imagination
  • Mental capacity to withstand price movements
  • Financial capacity to tolerate the value of investments going below our purchase price
  • Shielding ourselves from temptations of much better investments elsewhere
  • And also, accepting not being in control of the outcome at all.

It definitely seems too much to ask from an individual investor. To go back to Mr George Baker, even if we have the vision to find something worth investing and the courage to buy it, the patience to hold on to it might be hardest to find.

“To make money in stocks, you must have the vision to see them, the courage to buy them and the patience to hold them. Patience is the rarest.”

– George Fisher Baker

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