The stock market has long been long been touted as the place where you’ll make millions…or lose them. (The latter is said much more quietly than the former.) In any case, though, it can be an integral part of your investment strategy, along with real estate (here, too), gold and silver coins, 401Ks and other accounts.
The easiest way to invest in the stock market: research the possibilities, read as much as you can, then purchase stocks with the most potential to rise in value. Hold them forever. The end.
But is it the smartest thing to do?
A Closer Look at Buy and Hold
“Buy and hold” has been a popular mantra for decades. One of its poster boys is Warren Buffett, whose holding company, Berkshire Hathaway, is famous for its steady rise in value.
There’s one slight problem. Warren Buffett doesn’t completely practice what he preaches.
Take the example of a study of Berkshire Hathaway investment decisions, done by a trio of professors from UCLA Anderson School of Management and the Hong Kong University of Science and Technology. The paper’s long and weighty, but worth trudging through if you want a blow-by-blow account of Berkshire Hathaway’s stock purchases from 1980 through 2006.
What they discovered is no less than astonishing. Only 20% of Berkshire Hathaway’s stocks were held longer than two years. In fact, 30% of the stocks purchased never made it to their six-month anniversaries!
“A mythology has grown up around Mr. Buffett,” Mike Moody says, “that he has a somewhat magical ability to select stocks and then holds on to them forever. The truth is far more pedestrian, and encouraging since it is something any investor can do. He might be holding on to what is working, but his portfolio holdings are pared relentlessly. If I had to guess, I suspect Warren Buffett is simply doing what every good investor does. He’s using his best judgment to select stocks and then cutting the losers and letting the winners run.”
If The Great One doesn’t have a problem with jettisoning at least 80% of his stocks every two years, then buying and holding doesn’t seem like such a standard idea, after all. Others disagree. InvestorsGuide argues,“Buy and hold” doesn’t exactly sound like some brilliant investment strategy let alone like any path you want to take where investing your hard earned money is concerned. But, historical data tells us that the buy and hold strategy works with equities – given a long enough timeline.”
Should You Buy and Hold?
There’s no clear answer. But there are good arguments to be made for buying and holding stocks of solid ‘blue chip’ companies that have been earning consistently over the decades. (If those companies pay dividends, as well, it’s gravy.) The odds are good that they’ll continue this pattern — provided, of course, the market for their products doesn’t drop suddenly, or they’re taken over by a corporate raider who strips them for a quick profit.
If you decide to buy and hold, you should:
*Do your research. Read everything you can on the stock in question…and do regular checkups, even after you purchase it.
*Mix it up. Restaurant chains, medical suppliers, equipment dealers…different areas will experience slowdowns more than others. Peter Lynch, the legendary Magellan manager, advocated for buying stock of companies whose products he personally used. (Taco Bell was a particular favorite.)
*Discover what will still be needed, even if the economy tanks. Wal-Mart stockholders were happy campers when the economy went into turmoil — not only did the chain keep its usual customers, but higher-income people began shopping there more often, too.
*Not be afraid to jettison the low-performers. This is the hard part, selling them and losing money. Think of it this way: it’s far better than losing all of your investment. (And yes, I’ve done that.)
Another Strategy
I don’t sell investments professionally, though I often write about them. Therefore, this advice is on your own recognizance. But I’ve used a variation on the “buy and hold” method that’s worked very well for years:
Buy the stock. If you’ve done your homework, it should rise in value. When it hits its 52-week-high, sell enough stock to recoup your original investment. Hold the rest, as part of your long-term plan.
You’ve earned back your investment. Wherever the remaining stock goes, it’s still all profit. And what if stock prices go down? (As inevitably, they will.) If you believe in the company’s worth and longevity, buy more…then repeat. I’ve made a killing doing this with Apple, Pulte Homes and Red Robin stock, buying and selling three, four or five times. (Though after its wild ride up, I really wish I’d held onto that Apple stock longer.)
Buying and holding stock may be a good move — if you think it through.
I think buy and hold gets a bad rap because so many believe it means buy and forget. I tend towards buy and hold, in general, but that does not mean that changes are never made. I invest with a long term approach, but not a forgetful one.
John S made my point, so I’ll just say right on! Stock investing isn’t a ‘set it and forget it’ exercise.
I don’t dabble in stocks much, I stick to mutual funds, but buying and holding forever probably doesn’t work for many stocks. Too much volatility in the market would make this a bad plan. However, I’m sure there are a handful of companies out there that have steadily gone up over 30-years or so – slow and steady – like the blue chips.
Cyndy, this is a good write up. I like the advice, which I am practicing in slight modification myself. I wait when the stock reaches 50% gain and then I sell a portion of the holdings and let the rest run further. But my account is still too young and small to get to that point.
Also I think the buy and hold strategy is misinterpreted by many. The advisers will tell you “A”, but do not mention the “B”. You should hold as long as your stocks meet the criteria for which you originally bought them. When the stocks stops meeting them, sell. That’s why I like dividend investing, because it makes this “exit” part of the strategy a lot easier. You basically hold forever as long as the company meets two basic criteria – dividend growth and dividend yield.
In my opinion Buffett is a Value Contrarian, in other words he looks for value stocks and then looks for buying opportunities. He buys when everyone is running for the doors. The problem is that most people with money in the markets do not have the desire nor the skills to actively manage their holdings. Furthermore, most individual investors use mutual funds as their preferred investment vehicle and the performance of mutual funds is tied more to the fundamentals of market sectors than individual stocks. Most investment pros that actively manage portfolios can’t match the performance of the broad market indexes so what makes one think the general public would be able to make buy/sell decisions any better? For the average investor, investing in quality low cost index funds via dollar cost averaging and rebalancing quarterly will yield results much better than if they tried to actively manage a portfolio of stocks.
Hi guys,
I think you’re right in that many people misinterpret ‘buy and hold’ – but they are encouraged to do so by an awful lot of ‘experts.’ I am a little cynical about expertise, after seeing so many authorities flipflop right after the economy tanked in 2008, and suddenly start suggesting other strategies. I thought their advice was supposed to help you weather any kind of economic uncertainty — what happened?!?
(Ok, rant done.)
But I think parking all of your money in mutual or index funds also encourages the “fix it and forget it” mindset. Some money – yes. All of it, no. If you’ve done your research, a purchase in the ‘instinct’ category can do very, very well. (Gee, I think there’s an article for the future on following your gut.) And the hardest thing to do, particularly when the market’s going up, is to hold steady and not going hogwild.
Like now.
Thanks, everyone, for writing. I value your opinions.
I find nothing wrong with buy and hold. You have to find what you are good at and make it work for you. Buffett does what works for him and makes great money doing it. I buy, hold, analyze, sell, buy/sell more. As long as I am making a profit thats all I care about. i have some stocks that have run up 20% and dropped 30%. When they are up I cash a little out. When they dip I buy more if I believe in the company. Find something you understand and make it work for you. No right or wrong in investing if you making money legally.
I tried this with a group of shares, but then the the company that was managing them started charging me quarterly for more money than I was making from the shares. I sold the lot in the end but wish I could have held on to them for longer to see what happened.
I like buy and hold, but don’t go down with the ship. So basically, check in fairly regularly and make adjustments if needed, but don’t jump ship too early.
Buy and hold is not going to help every time. Rather you need to keep your eye on the market and change accordingly..
Buy and hold will help you, If you have do the proper research and regular check up. Make any changes if needed and keep patience for long term benefit.