You know, I was standing at a coffee shop this
morning waiting for my latte and I saw a guy
in front of me just glued to his phone and he
wasn't texting or on social media. He was watching
one of those candlestick charts on a trading
app, just watching these little green and red
bars flicker up and down. And he looked. It's
the modern condition, isn't it? We've sort of
gamified the global financial system to the point
where it fits in your pocket and gives you a
dopamine hit or a cortisol hit every three seconds.
Exactly. We are absolutely obsessed with speed.
High frequency trading algorithms that execute
orders in nanoseconds. Right. You have day traders
trying to scalp a few cents off a stock movement
before their lunch break. It feels like if you
aren't moving at the speed of light, you're losing.
Well, today I think we're going to pull the emergency
brake on all of that. I hope so. We are going
to look at a strategy that is arguably the complete
antithesis of that entire culture. It really
is. We are unpacking a concept that feels almost,
I don't know, counterintuitive in 2026. It's
basically the art of doing absolutely nothing.
Well, I push back slightly on the word nothing.
It's the art of doing nothing physically in terms
of, you know, clicking buttons, but doing something
very, very difficult psychologically. That's
a fair point. We are diving deep into buy and
hold. Yeah. And before you reel your eyes and
think, OK, I know this, just buy an index fund
and forget about it. Stick with us. Please do.
Because when you actually dig into the source
material, and we have a huge stack today ranging
from Federal Reserve data to deep academic theory.
This isn't just about laziness. It's a sophisticated
financial framework that is technically known
as position trading. That's the formal term,
yes, position trading. And the mission for this
deep dive is really to answer one specific question.
What's that? Why is this passive style, where
you essentially stand still like a statue, often
so much more profitable than the active style
where you're sweating over monitors trying to
beat the market? It's the paradox of effort.
It's so strange. Usually in life, working harder
gets you more results. You know, if you dig a
ditch for 10 hours, you get a bigger ditch than
if you dig for one. But in investing, working
harder, trading more might actually just make
you broke. That is exactly what the data suggests.
The correlation between activity and profitability
is very often negative. It's a shocking finding,
but it's true. So we've got the philosophy of
billionaires, we've got the cold hard math on
taxes, and we've got some fascinating insights
on cognitive biases. It's a great mix. Let's
get into it. What exactly is this beast we are
dealing with? Okay, let's strip away the jargon
for a second. When we say buy and hold or position
trading, we are talking about a specific mindset.
The source material defines it as an investment
strategy where an investor buys assets. And this
is a key distinction. They can be financial assets
like stocks or they can be non -financial assets
like real estate. Right. So this isn't just for
the stock market. You could position trade. A
plot of land or a piece of art. Exactly. You
buy it with the intention of holding it for the
long term. And the primary goal, the only real
goal, is realizing price appreciation. But there's
a catch. There is. Here's the caveat in the definition
that I think does all the heavy lifting. It says
you do this despite volatility. That is the position
trader's litmus test right there. Volatility
is, I guess, the price of admission to the whole
show. It is. And can we define volatility for
a second? Because I think people hear that word
and they just think. danger or risk or I'm losing
money. Please do. It gets thrown around a lot.
In finance, volatility usually refers to how
much the price of something swings around its
average. We use standard deviation to measure
it if you want to get technical. So give me an
example. Low versus high. Okay. If a stock goes
from $100 to $105, then down to $102, that's
low volatility. It's a gentle ride. Like a lazy
river. A lazy river, exactly. But if it goes
from $100 to $150 and then crashes down to $50
in a month... That's high volatility. That's
the roller coaster that makes you want to throw
up your lunch. Exactly. Now, the active trader
or just the average person looks at that drop
to $50 and they panic. They sell to stop the
bleeding. The position trader looks at that wild
swing that dropped to $50 and does nothing. See,
that's where that lazy label comes from, isn't
it? Yeah. If the house is on fire, you run. If
your stock portfolio is crashing and you do nothing.
Are you being disciplined or are you just asleep
at the wheel? That's the common misconception,
and it's a great question. The strategy is classified
as passive management, yes, but our source material
is very clear. This is not ignore and forget.
It's not. No. It requires a profound level of
confidence. You are holding, because you have
a fundamental thesis, a core belief, that the
value of what you own will be higher in 10 or
20 years. So it's an active choice to be passive.
Yeah. You aren't paralyzed by fear. You are,
I guess, frozen by conviction. Exactly. It's
like being a captain. of a ship in a storm you
aren't spinning the wheel wildly trying to dodge
every wave you're holding the course because
you know where the port is okay so to do that
what kind of person do you have to be the source
talks about the mindset required yes and this
is where it gets tough for most people the source
says you have to battle some very specific inner
demons first you cannot be prone to emotional
decision making which is asking a lot of the
human brain we are wired to flee from pain And
a big red number on a screen feels like pain.
It absolutely does. Neuroscience studies show
that financial loss registers in the brain very
similarly to actual physical pain. So you have
to first understand your own risk aversion. Know
thyself. Know thyself. But the biggest enemy,
the one mentioned specifically in our source
stack, is recency bias. I love this concept.
Let's break this down because I think everyone
suffers from this, whether they invest or not.
For sure. Recency bias is this cognitive glitch
where our... Our brains assume the future will
look exactly like the immediate past. It's a
mental shortcut our brains take to predict what's
coming next. It's efficient, but often wrong.
So if the market has been on a tear going up
for six months straight. You assume it's a golden
age that will last forever. You feel rich. You
feel smart. And your brain just extrapolates
that line going up and to the right indefinitely.
And conversely, if the market dropped 5 % yesterday.
You assume it's going to zero tomorrow. You extrapolate
that immediate pain into the infinite future.
That feels very familiar. It's human nature.
A true position trader has to like. surgically
remove that part of their brain. They do not
judge the long term future based on the last
five minutes of data. They do not sell just because
of a temporary decline in value. It sounds almost
stoic. Like you said, it's not about being lazy.
It's about being incredibly disciplined. Like
Marcus Aurelius managing a hedge fund or something.
It is stoicism applied to finance. It's all about
separating the signal, which is the long term
value creation of a business or an economy from
the norm. which is the daily meaningless price
fluctuation. OK, so that's the definition. It's
a long term marriage to your assets through sickness
and in health. But let's look at the resume.
Who actually vouches for this? Because if it's
just academic theorists in an ivory tower, I'm
a little skeptical. And you should be. But the
source lists a murderer's row of investors here.
It's not theory. It's practice. Lay the names
on me. It's the financial equivalent of Mount
Rushmore. We are talking Warren Buffett. Obviously.
Jack Bogle, the founder of Vanguard. Burton Malkiel,
who wrote A Random Walk Down Wall Street. A classic.
John Templeton, Peter Lynch, Benjamin Graham.
I mean, the list goes on. I want to pause on
that list because those aren't just rich guys.
They represent totally different, sometimes opposing
philosophies. That's what strikes me as odd.
Right. That's the key insight here. This is not
a niche belief system. You have Warren Buffett
and Benjamin Graham, the kings of value investing.
They spend their lives picking individual stocks.
They analyze balance sheets. They interview management.
actively looking for diamonds in the rough. The
ultimate active managers in terms of research.
Then you have Jack Bogle, the father of the index
fund, who basically said, don't even try to pick
stocks. Just buy the whole market and go on vacation.
Right. Buy the haystack. These guys shouldn't
agree on anything. It's like a cat and a dog
agreeing on what to have for dinner. But they
do. They disagree on what to buy, but they agree
entirely on how to hold it once you've bought
it. Why? What is the common denominator? that
unites a deep value stock picker like Graham
with a broad market indexer like Bogle. It's
the macro justification. The source points this
out very clearly. They all believe that in the
long run, there is an extremely high correlation
between the stock market and overall economic
growth. Betting on civilization or betting on
America, as Buffett likes to say. Essentially,
yes. If you believe that human beings will continue
to innovate, that populations will generally
grow, that productivity will increase over time,
then you believe the economy will grow. And if
the economy grows, corporate profits grow. And
if corporate profits grow, then over the long
term, stock prices have to rise to reflect that.
It's just math. So if you trade in and out, jumping
out of the market because you're scared of a
recession or some headline. you are effectively
betting against human progress. Or at least you're
risking missing the ride when it resumes. The
stock market is the engine of the economy. If
you unplug the engine every time it sputters
or makes a funny noise, you will never get anywhere.
It's interesting because it reframes investing
from gambling on a ticker symbol to participating
in capitalism. That's it. You are an owner, not
a gambler. Owners don't sell the business just
because it had a bad month. If you owned a local
pizza shop and you had a slow Tuesday, you wouldn't
put a for sale sign on the door on Wednesday
morning. No, you'd wait for Friday night when
everyone wants pizza. Exactly. Buy and hold is
about treating stocks like what they actually
are. Fractional ownership of real businesses,
not like chips in a casino. OK, I want to get
a little nerdy here because the source material
dives into the theory behind this. And there's
a conflict in the logic that I'm struggling to
wrap my head around. Let's do it. We talked about
Buffett. And the source also brings up the efficient
market hypothesis or EMH. Right. This is the
great theoretical battleground of modern finance.
So walk me through the efficient market hypothesis
first. For the listener who maybe skipped Ecom
101, what is the elevator pitch? The EMH. In
its simplest form, basically states that the
market is a giant, hyper -efficient information
processing machine. It takes all known news,
all earnings reports, all fears, hopes, and data,
and incorporates it into the price of a stock
instantly. So because of that, every stock is
always fairly valued. That's the conclusion,
yes. There are no real bargains to be found.
If a stock is trading at $50, the EMH says it's
because it's worth exactly $50 given everything
we know right now. So there's no $100 bill lying
on the sidewalk because in a world with millions
of investors, someone else would have already
picked it up. That's the classic analogy, yes.
Okay, so if you believe in the EMH, you buy and
hold because active trading is pointless. You
can't beat the market because the market is always
right, so you just join it. Correct. If the price
is always right... Trying to find a wrong price
is a fool's errand. You just buy the whole market
and hold it forever. In fact, the extreme EMH
advocates say you should never sell a security
unless you specifically need the liquidity like
you need to buy groceries or a house. But here
is the paradox. The Buffett paradox, as the source
calls it. Warren Buffett is the poster child
for buy and hold. His favorite holding period
is forever. But he's famously said on many occasions
that the efficient market hypothesis is complete
nonsense. He has. He's been very vocal about
it. He has a great quote where he essentially
says that if the markets were efficient, he'd
be a beggar on the street with a tin cup. So
wait a second. Buffett thinks the market is inefficient,
that it makes huge emotional mistakes. Yes. But
the EMH says the market is perfect and never
makes mistakes. How do they both end up advocating
for the exact same strategy? This is the nuance
that I think most people miss, and it's a fantastic
point. They arrive at the same destination from
two completely different starting points. Okay,
walk me through it. Buffett buys stocks because
he thinks the market is inefficient. His entire
fortune was built by finding a wonderful company
that is intrinsically worth, say, $100 a share,
but is selling for $50 because the market is
panicking about a short -term problem or just
ignoring it. So he exploits the market's mistake.
He finds and exploits the mistake, but... And
this is the crucial buy and hold part. He knows
the market will eventually fix that mistake.
The market will come to its senses, but it might
not happen tomorrow. It might take five years
or 10 years. So he buys the undervalued asset
and just holds it patiently until the market
price catches up to the business's true value.
OK, I think I get it. So the EMH believer says
buy and hold because the price is always right.
Correct. And Buffett says. Buy and hold because
the price was wrong. When I bought it, I got
it cheap. And now I'm just waiting for all of
you to figure out that I was right. Precisely.
One path is based on humility. The idea that
I know nothing, the market knows everything.
The other path is based on a sort of intellectual
arrogance. I know more than the market does about
this specific company. But both paths lead to
the exact same behavior. Inactivity. Holding.
It really shows the robustness of the strategy
then. It works whether you think you're a genius
investor or whether you think you're perfectly
average. As long as you have the patience. That
is the one non -negotiable ingredient, no matter
which philosophy you follow. All right. Enough
of the high -minded philosophy. Let's talk about
something everyone understands. The wallet. Because
even if you don't care about market theory or
Buffett, there is a very boring, very mathematical
reason why buy and hold almost always wins. The
friction argument. Yes. This is where the debate
often ends for practical people. Friction. I
like that word. It implies resistance, something
slowing you down. And that's exactly what it
is. Every time you move your money, every time
you buy or sell, someone takes a slice of it.
The source mentions commissions. Right. Commissions.
Now, I know people are thinking, well, I use
Robin Hood or some other app. Trading is free
now. That's the marketing slogan. Yeah. Zero
commission trading. But it's not really free.
There are hidden costs. There's something called
payment for order flow, where your broker sells
your order to a high frequency trading firm to
execute. There are bid ask spreads. That's the
tiny difference between the price you can buy
at and the price you can sell at. We call this
slippage. So you're always leaking a little bit
of oil every time you shift gears. Exactly. And
if you're shifting gears 100 times a day, you
run out of oil pretty fast. The buy and hold
investor, meanwhile, just sits in one gear for
20 years. They minimize all those little transaction
costs. Those are small leaks. Let's talk about
the big one. The shark in the water. It's not
your broker. It's the IRS. The taxman. This is
where the math becomes absolutely brutal for
active traders. Break down the difference for
us. Short term versus long term capital gains.
OK. Generally speaking. In the U .S. and many
other tax jurisdictions, the tax code is written
to reward patients. If you buy an asset and then
sell it for a profit within one year, that profit
is considered a short -term capital gain. And
that's taxed how? That is usually taxed as ordinary
income. So it's taxed at the same high rate as
my salary. Exactly. So if you're a high earner,
that could be 35%, 37%, sometimes more, of your
hard -won profit going straight to the government.
Ouch. That stings. But if you hold that same
asset for over a year, even just one day over
a year, it becomes a long term capital gain.
And that tax rate is significantly lower. How
much lower? Often 15 percent or 20 percent for
most people, sometimes even zero percent for
lower income brackets. It's a massive difference.
So by trading frequently. by being active you
are voluntarily opting into a much higher tax
bracket on your winnings you are actively penalizing
your own success you are giving away your edge
to the tax man but wait it gets even better for
the buy and hold investor there is a second layer
to this it's called the deferral effect this
is the real magic of compound interest right
yeah this is where the magic happens yes remember
you only pay tax when you sell The act of selling
is what's called a taxable event. Right. So let's
say you buy a stock at $100 and it goes up to
$200. You have a $100 unrealized gain. If you
don't sell, how much tax do you owe? Zero. Zero.
That entire $200 stays in the market, working
for you, compounding for you next year. And if
you do sell? The moment you sell, you trigger
the taxable event. Let's say you owe, I don't
know, $30 in taxes on that gain. You pay it immediately.
Now you only have $170 to reinvest for next year.
You have permanently impaired your capital base.
We call this tax drag. You are dragging a heavy
anchor behind your financial boat. So selling
doesn't just risk missing a future market rally.
It guarantees a bill from the taxman today. Exactly.
The buy and hold investor is essentially getting
an interest free loan from the government on
their deferred taxes. You are keeping the government's
money and using it to make more money for yourself,
potentially for decades. It's the most powerful
and most overlooked advantage they have. When
you put it that way, active trading feels like
trying to run up a down escalator. You're working
so incredibly hard just to stay in the same place.
That's a great analogy. And the math supports
it time and time again. The friction of taxes
and transaction fees is often more than enough
to wipe out any alpha or extra profit a brilliant
trader might generate. Okay. So the math is clear.
The theory is clear. The titans of the industry
all agree. So why doesn't everyone just do this?
Why is... Day trading is still a thing. Why do
we have entire cable news networks dedicated
to what the market is doing right now? Because
we are human. And humans, it turns out, are just
terrible investors. Our brains are hardwired
for survival on the savannah, not for compounding
interest on Wall Street. We have some really
specific data on this in the source notes from
the Federal Reserve Bank of St. Louis, an economist
named Yili Qin. Yes. This study is absolutely
fascinating and a little bit depressing. He looked
at a phenomenon called return chasing behavior.
Which sounds exactly like what it is. It is.
He analyzed the flows of money into and out of
equity mutual funds over a long period, and he
found a pattern that is almost tragic in its
predictability. What other pattern? Investors
tend to pour money into funds that have had high
past returns, and they pull their money out of
funds that have had low past returns. Okay, I
have to play devil's advocate here for a second.
That sounds logical on the surface. That horse
is winning, so I'm going to bet on that horse.
If a fund manager is hot, I want to give him
my money. Why is that a trap? It's a trap because
the stock market isn't a horse race. In a horse
race, a fast horse is usually still fast tomorrow.
In the stock market, we have a powerful force
called mean reversion. Mean reversion. That sounds
ominous. It just means that things tend to go
back to the long -term average. If a fund just
had a spectacular year and went up 50%, it is
statistically very likely to cool off. It outperformed
the average, so gravity is going to pull it back
down toward that average. And what about a fund
that just had a... a terrible year and dropped
20 percent. Well, it's statistically more likely
to bounce back in the future. It's underperformed.
It's likely undervalued and it will probably
revert back up toward the mean. So by chasing
the winner, you are almost always buying at the
peak. You are buying high. after the great returns
have already happened. And by selling the loser,
the fund that is doing badly, you are selling
at the bottom. You are locking in your loss right
before the potential recovery. The data had a
specific number attached to this, a correlation
coefficient. What was it again? Right. Yilichin
calculated the correlation between fund flows,
that's the money moving in, and the fund's past
performance. The number was positive 0 .49. Okay,
for the listener who isn't a statistician, translate
what a 0 .49 correlation means. Sure. Correlation
runs on a scale from an X1 to plus 1. Zero means
there is absolutely no relationship. It's totally
random. A plus 1 implies a perfect lockstep relationship.
If A goes up, B always goes up by the same amount.
So 0 .49 is a moderately strong positive relationship.
And what does that prove? It proves, mathematically,
that investors are driving while looking exclusively
in the rearview mirror. And getting into a lot
of wrecks because of it. Yilichin's conclusion
in the paper was brutal and direct. He said this
behavior explicitly reduces profit. You are systematically
doing the exact opposite of the golden rule of
investing. Buy low, sell high. You are, as a
group, buying high and selling low. It's a behavioral
tax. We are paying a tax for our own impatience
and our own biases. It's the cost of following
your gut. Your gut says, get out, it's crashing,
or get in, everyone is getting rich. And in finance,
your gut is almost always wrong. This leads us
perfectly into the final boss of bad investing
habits, market timing. The ultimate vanity project
for an investor. The source defines market timing
as selling a security with the specific goal
of buying it again at a lower price. It's that
fantasy we all have. I'll just get out before
the crash, and then I'll buy back in at the absolute
bottom. And it is a complete fantasy. It assumes
that you sitting at your kitchen table are smarter
than the collective wisdom of millions of other
professional and amateur investors all looking
at the same information. We've all heard the
little sayings and adages sell in May and go
away. The source mentions that one explicitly.
They're called calendar effects. The idea that
historically stocks have done poorly in the summer
months. So you should sit it out and get back
in around November. A buy and hold investor rejects
this entirely. Why? I mean, is the historical
data wrong? Sometimes the historical data shows
these little patterns, sure, but they aren't
consistent enough or strong enough to trade on,
especially after you factor in the taxes and
the transaction fees we just talked about. Right.
But more importantly, the source references a
specific study by Metcalf in a scientific journal,
PLOS One. PLOS One is a serious peer -reviewed
journal. What was their verdict on market timing?
The verdict was clear. Market timing, on average,
causes poor performance. The mathematics of timing
usually work against the investor. Why is the
math against you? It feels so intuitive. If I
sell before a 20 % crash, I win. Right. You only
win if you get back in at the right time. That's
the catch. You have to be right twice. Explain
that. That's a really good point. It's not enough
to know when to sell. Let's say you're a genius
or you just get incredibly lucky and you sell
everything right before a 10 % market drop. You
feel like a god. You're patting yourself on the
back. You save 10%. But then the hard part begins.
When you go up back in, the market starts to
tick up a little bit. You think, oh, that's a
dead cat bounce. It's a trick. It'll go lower.
Right. I'll wait for the real bottom. Exactly.
Then it goes up more. Now you think, OK, I'll
just wait for a little pullback to get back in.
Before you know it, the market hits a new all
-time high. Now you are totally paralyzed. You
have to buy back in at a higher price than you
sold at. You lost money by trying to save money.
There are those famous studies. I don't think
they were in this specific source, but they're
everywhere, about what happens if you miss the
market's best days. Oh, absolutely. The source
alludes to this massive risk. The vast majority
of the market's long -term gains are often concentrated
in a very, very few explosive trading days. And
if you miss them? If you miss just the 10 best
trading days over a 20 -year period, your total
returns often get cut in half. or even worse.
And those best days usually happen right in the
middle of the worst chaos and volatility. They
do. The biggest up days often happen right after
the biggest down days. So if you panic and sell
on the scary down day, you are guaranteed to
not be there for the massive recovery day that
follows. So if you try to dodge the raindrops,
you end up missing the rainbow. Cheesy, but surprisingly
accurate. Buy and hold is, at its core, an admission
of humility. It's an investor saying, I cannot
predict the future. I cannot predict the next.
news cycle. I cannot time the market's emotional
swings, so I will simply own the assets that
benefit from the long -term growth of the economy.
Wow. We have covered a massive amount of ground
today. We started with the paradox of speed,
why doing nothing is often the hardest and smartest
thing to do in a fast -paced world. We define
position trading. It's not laziness, it's confidence,
despite volatility. It's the willingness to suffer
short -term pain for long -term gain. We looked
at the strange bedfellows of Warren Buffett and
Jack Bogle, and we realized that whether you
think the market is perfect like the EMH people
do, or completely crazy like the value investors
do, the practical answer is the same. Hold on.
We saw the brutal math on how taxes and fees
eat active traders alive, that friction is the
silent killer of wealth. And we exposed our own
worst enemy, our psychology. That .49 correlation
coefficient from the St. Louis Fed showing how
we are hardwired to chase yesterday's winners
and lock in losses. It seems like buy and hold
isn't just an investment strategy. It's more
like a... a defense mechanism. That's the perfect
way to frame it. It protects you from the market.
Sure, it protects you from volatility, but mostly
it protects you from yourself. It protects you
from your own destructive urge to tinker. The
urge to do something when the absolute best thing
you can do is nothing. Now, I want to leave the
listener with one final thought that really stuck
with me from the source notes. It's a bit of
a brain teaser. The source mentioned that the
most extreme advocates of the efficient market
hypothesis say you should never sell unless you
absolutely need the money. Right. That is the
ultimate logical conclusion of their theory.
If everything is always perfectly priced, there's
no reason to move. So here's a question. If that's
true, if the price is always fair, does the act
of selling ever make sense from a purely investment
standpoint? Or is selling purely a lifestyle
decision? That is a profound question. Because
if the market is truly efficient, you never sell
to take profits because where would you put that
money? Any other asset you buy is also, by definition,
fairly priced. So there's no advantage. And you'd
never sell to cut your losses. Because the current
price is already the fair price reflecting all
known information. Selling doesn't help. Right.
So the only logical reason to ever sell is because
you need a sandwich. Or a house. Or to pay for
retirement. Okay. It completely turns investing
into a pure utility function. It takes the game
and the ego out of it entirely. You aren't trying
to score points. You're just trying to store
value for when you need to spend it. And maybe,
just maybe, stopping treating your life savings
like a game is the single best piece of financial
advice there is. I couldn't agree more. Sometimes
the winning move is not to play. Just stand there.
Thanks for diving deep with us. We'll see you
next time.