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.)
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.