Some Crucial Lessons About Buy-and-Hold Investing

One mantra that everybody even remotely acquainted with investing has heard for many years now is “buy and hold”.  I first learned about it over 20 years ago, but I was too impatient to put into practice plus I didn’t have the right information.  Finally, after ‘seeing the light’ upon learning the right information, here are some things I’ve learned since putting it into practice over the past couple of years.

If I could turn back the clock 20 years and start to practice what I know now, I would easily have several times more money saved toward my retirement, even factoring in the crashes of 2001 and 2008.  The lessons are simple but their impact upon your investing success can be profound if you understand and follow them.

It’s hard to do, but it’s worth it!

Looking at the most recent returns of my portfolio, four of my holdings (4 out of 14) have greater than a 25% return with one of them currently around a 110% return.  The first of my holdings was purchased less than 2 years ago in August 2013.  (I’ve owned stocks for several years, but 2013 marked the start of a major turnaround in my investing fortunes.)

Now I don’t write all this to brag, but rather I’m excited because prior to 20 months ago, holding any stock for more than 6 months was a stretch for me.  But after becoming convinced of the merits of buying-and-holding over the long-term, I decided to finally start doing so and I’m quite impressed with some of the results this early on.

In terms of long-term investing, less than 2 years is barely a blip on the radar.  In order to be truly long-term, different stock-investing-advice services and investment gurus will tell you that you shouldn’t be buying any stock unless you have at least a 3- to 5-year time frame.  And in a few years, other statistics I’ve come across tell me that most of my current “losers” should be in positive territory if they are quality companies, i.e. ones that have a solid leg to stand on in terms of a product and/or service.

Sierra Wireless (SWIR) in particular has been a real test of my nerves at times.  Smaller-cap stocks are just that much more volatile, and they’ll put any buy-and-holder to the test!  Within the first several months of buying it, the price surged by a few dollars then twice came back very close to my buy price.  However, I continued to hold and in the late summer of 2014 it surged nicely but then dropped about 25%.  At that point, I got a little concerned, but then it spiked rapidly upward until it was up over 2.5 times (about a 160% return).  It has since settled back to around a 2-times return, but that’s still very good for just 18 months of owning it.

So the moral of the story is, if you believe in a stock then hold it for as long as you can, but don’t bother buying any stock unless you have at least a 3-5 year time frame.

It only works if you buy quality

Occasionally for fun I check out the price of some of the penny and small-cap stocks that I used to own in order to try to win the stock market “lottery”, before eventually losing tens of thousands of dollars forced me to realize that the stock market NEVER favors the short-term gambler over the long-term investor.  (I’ve also learned this by looking at stats and reading many other testimonies.)

Some of those companies have simply gone under or become de-listed from the stock exchange.  Most of the other ones are now worth only a few pennies, many of them trapped in an endless cycle of being worth a penny one day and two pennies another.  That’s a sure sign of a stock in its death-throes, especially if was once worth several times as much or even well over a dollar.  (Some were once worth several dollars.)

Then I look at the stock charts of what I refer to as “quality” companies, those that have something good really going for them, like huge brand loyalty and/or popularity, or who are leaders in their industry, and especially those that have a lot of repeat sales (dare I say addicted customers?) like the Apples and Starbucks’ of the investing world.  When I look at the 1- or 2-year charts, I usually see some sort of ‘choppiness’ in the prices.  However, when I change the view to a 10-year or a “maximum” in order to show the stock’s entire history, that choppiness smooths out into broader peaks and troughs (like in 2001 and 2007) and spikes sharply upward.  The best stocks are hundreds of times higher in value now than they were even ten years ago.

So I’ve learned that buy-and-hold only works long-term if you buy a company that actually has some sort of a track record.  I’ve stopped buying mining stocks, for example, that don’t yet operate a mine.  (I lost more money in the past on mining companies that only owned a patch of land with possibly some valuable ore content than I care to mention.  But that means jack-squat if the ore remains in the ground.)  I’ve stopped buying stocks of companies that have a lot of “what ifs” and “maybes”, like a first plant or facility that is only scheduled to be built but hasn’t yet been, or a product that is still a prototype and hasn’t yet gone into production.

Yes, there are odds that such a company will realize its dream, albeit slim, but I’ve learned that it’s far better to put your money into something that’s pretty much a sure thing, something that’s already wildly successful (ex. AAPL, SBUX, UA) or that is still small but has strong, consistent, concrete results indicating that it will be something big in the future (ex. CLNE, SWIR, XPO).

It doesn’t care about a stock’s current price

Most people think they’ve ‘missed the boat’ after a company’s stock price has risen a lot.  I remember reading a forum thread on the site of a stock-advice service recently about people who wanted to buy some Berkshire-Hathaway stock back in the 1980s.  As of this writing, their Class A stock (BRK.A) closed at a price of just under $213,000 per share.  One of the people on the forum was mentioning how he once wanted to buy 10 shares of that stock back when it was about $2,000 per share, but because he only had enough money at the time to buy 9 shares and he was so stuck on owning 10 shares, he ended up buying none at all!  I’m sure that the more than 100-fold increase in stock price since then haunts that person every single day.  I might have been tempted to take a long walk off of a short bridge.  If he had bought even one of those shares, he would have had enough to pay for a good portion of a house today!

Now at least this person didn’t think that Berkshire-Hathaway stock was too expensive to consider at that price; rather, he/she was just absurdly obsessive-compulisve about having a neat-and-tidy number of shares.  But nearly everybody else without hindsight would think that $2,000 per share of ANY stock is entirely outrageous, especially back then.  So most people today turn up their noses at Google stock at $530 per share or Priceline stock at over $1,100 per share, or companies like Markel at over $770 per share that some have dubbed as potentially “the next Berkshire-Hathaway”.  Yet all of these companies have incredible potential still ahead of them, and so their current price frankly doesn’t matter.

The fact is, a great company’s stock isn’t hindered by its current price.  So whether a stock is worth $10 or $1,000 per share, you need to look beyond the price at what potential it still has for the future.  If it’s still firing on all cylinders, then it can double or more just a fast as a stock selling for way less per share.

These are some of the things I’ve learned thus far about buying-and-holding stocks after ignoring this concept for far too long.  Hopefully they can benefit you as well.

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