- Value Investing
|- Income Investing
- Buy and Hold Strategy
- Buy What You Know
The Dow Theory
Election Cycle Theory
Dow Dividend Theory
Initial Public Offerings
Dollar Cost Averaging
- Risk Tolerance
Buy and hold is a timing
strategy, which uses the same concepts as the time value of money. If you
own a company that is growing, it will be worth more in the future then it
is today. It reduces the problem of constantly timing the marketís ups and
downs and keeps trading costs to a minimum. Inflation risks are
automatically hedged. Over time, companies naturally pass on cost increases
to their customers, resulting in higher EPS and therefore higher stock
prices to counter the negative effects of inflation. Buy and hold, however,
does not eliminate the issue of knowing when to buy and when to sell. When
executing a long-term strategy, investors need to really understand their
core being. Buy and hold investors, in particular, need to understand
themselves, to ensure their long-term strategy matches their financial and
risk objectives, as well as, their personality. Holding a stock requires
strong discipline and belief in oneself. Being afraid to trade a security or
holding a stock for sentimental reasons may not be a valid or profitable
For an investor to make
money in the stock market, there are only a few decisions that have to be
made correctly. The first is the company they buy and the price they pay. A
friend of mine bought Genentech on the first day of trading; great company
wrong price. She held it almost twenty years, maybe she tripled her money.
The moral is you need to buy low. If one grossly overpays for a security,
holding it forever wonít cure their initial mistake.
Additionally, the stock needs to be conducive to a buy and hold strategy.
For example, utilities,
consumer products, food, defense, oil and banks are the types of industries
that have recurring customers and products that take to the buy and hold
style. While these companies normally wonít produce ďthe big win,Ē they
should provide an above average steady return, without the risk of losing it
all if a ďbetter mousetrapĒ is built by a competitor. Aqua America,
Colgate-Palmolive, and Kellogg are
the classic examples of buy and hold companies. Companies that constantly
have to invent new products to keep up with changing demand and have stiff
competition, along with a short product life cycle, are not buy and hold
type companies. For example, technology companies always need to invent new
products. These are not buy and hold type companies.
When a company has to
continually develop new products and sell them to new customers, itís hard.
Eventually, the grind gets to them. What about companies like IBM? They are
the exception. Many people forgot about Burroughs, Sperry, NCR, Digital and
Wang. Drug companies were for decades the classic buy and hold stocks. Now,
however, competition is extreme, and they cannot create new drugs fast
enough to replace the lost revenues from compounds coming off patent
protection. R&D issues, together with socialized healthcare on the horizon,
caused these companies to lose their buy and hold appeal and some are even
considered risky investments.
Many people have the
wrong view of what buying and holding represents. Some feel that they could
buy a stock and forget about it for 40 years. I donít know where this
philosophy ever came from; itís wrong and itís foolhardy if you practice it!
Holding a security doesnít mean you stop thinking after you purchase it.
Making money in the stock market is a job. Once you buy a security, you have
to follow it and monitor its performance. Investors should read the
companyís annual report or SEC form 10-k and quarterly reports and even the
8-kís. The 8-kís are material events that require fast disclosure to the
SEC. If the company changes its management or business model, you need to
re-evaluate if the changed company is still what you want. Investors should
also watch the stock price. There is no need, however, to track stock prices
daily on the internet, but you should read your monthly or quarterly
brokerís statements. If you bought a great company and its stock price went
way up, maybe even discounting the next 10 years of growth, you need to
sell. Selling is a natural part of owning a security. When the stockís
expectation greatly exceeds reality itís time to sell. Coca-Cola is a great
company; back in 1998, when it sold at a 62 P/E ratio, it was time to sell
and wait for its growth to catch up to itís price. Even a buy and hold style
requires monitoring your investments. Remember the game is to make money,
not to own stocks for the stake of owning stocks.
An easy way
to compound your return on a buy and hold stock is to reinvest the
Buy and hold is a time
tested and proven strategy that has historically worked, and still does. A
stock, however, must be conducive to a buy and hold strategy, the company
needs to be periodically monitored, and the long-term (5 years to a decade
or two) strategy must fit the personality and goals of the investor.