All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies. — Warren Buffett
One of the cornerstone principles of the street smart philosophy is to introspect stereotypical investment ideas prescribed by the main stream media. That includes their buy and hold strategy that most of us mere mortals practice religiously.
Street smarts learn their lessons from the trenches. If you are a buy and hold investor, beware!
The buy and hold strategy can kill your portfolio. Before you shrug off my seemingly unhealthy advice for your portfolio, I want few more minutes of your time to convince you that I am not so naïve.
Three years ago, I met a friend of mine for a breakfast at his house. We set in his porch while someone was taking care of the landscaping work.
Friend: I lost over $200,000 in AIG stock recently. I was told by my stock broker that you can’t go wrong, if you follow the buy and hold strategy with a company such as AIG. So, as stock price was dropping — after the market crash in 2008 — I kept selling stocks that made me money to buy more AIG. Now, the company has announced reverse split, and I’ve lost most of my investment.
While he was talking, I was looking at the man who was removing weed and nurturing nice shrubs.
Me: Investing is lot like your landscape. You need to remove weed and nurture your beautiful shrubs.
Friend: What do you mean?
Me: We — mere mortals — do exactly opposite when it comes to investing compare to what we do in our lives with other things. If you are in business, you discount merchandise if it doesn’t sell. We protect our life with an insurance policy. And we remove weed and let shrubs grow. But when it comes to investing, we sell stock at a discount to feed one that is killing our portfolio. It’s akin to killing shrubs and letting weed grow.
The Buy and Hold Strategy vs The Buy and Beware Strategy
The buy and hold bring complacency. It’s good to invest for the long haul as long as the company you invest in can execute flawlessly by delivering awesome products and services. That usually translates into growing earnings per share, growing sales and growing free cash flow.
The wise man — my favorite Warren Buffett — says that there are two important factors to consider for the long-term investment.
1. Picking good stocks at good times
I normally invest in the large cap stocks like Apple, Google, IBM and JNJ. It’s very important to pick high quality company that dominates its market niche with a major market share. Timing is equally important.
Price is what you pay. Value is what you get. — Warren Buffett
You have to use your judgement, but quality stocks are not cheap. I normally use 50 Day moving average, and buy more shares in an incremental fashion when stock pulls back near its 50 day moving average.
2. Stay with the company as long as it is a good company
This is the factor many investors ignore with their buy and hold stock strategy. The stock market success hinges not only on your acumen to pick great companies, but also on knowing if it remains a great company while you hold the stock.
If a business does well, the stock eventually follows. — Warren Buffett
History has shown that once considered great companies are extinct species now — Enron, General Motors(Original), WorldCom are just a few names you can think of.
I read an interesting article recently. The article emphasized that due to dominance of hedge funds and their financial strength, average stock holding period for all stocks went down to 3.2 months after year 2000 compared to 4 year between 1926 and 1999.
I think this is a powerful transformation we — small, retail investors — can profit from. While major hedge funds influence stock price with their short-term buy and sell in an ever-changing global economic landscape, you can keep buying shares of a great company like Apple or IBM when they are on sale.
The buy and hold strategy is neither dead nor less relevant in today’s market; it’s the complacency to ignore facts about your investment that kills your portfolio.
Remember that when you buy shares of a company, you are investing in that business. Like any other businesses that you’ve invested in before, you have to take active interest in gauging your investment regularly to make sure that you are allowing only great companies to remain in your portfolio.
All good things come to an end at some point. Even Apple won’t be able to deliver awesome products for ever. When that time comes, I won’t hesitate to sell it just because it was a great company in 2012.
Readers: Do you have a disciplined approach when it comes to individual stock investment? When do you decide to buy more or sell certain stock? If you don’t know the answer, it’s always safer to invest in a no-load index fund to protect and grow your hard-earned money.
The first rule is not to lose. The second rule is not to forget the first rule. — Warren Buffett
Photo by: Going Concern