Buy and Hold is Here to Stay
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After stumbling upon the 2009 book "Buy and Hold is Dead, I asked myself, "Did I fall asleep and wake up in a world without a stock market?" Let me tell you why.
The buy and hold strategy is the safest way to invest your money, because while you will likely experience downturns with certain stocks, you will also be invested when the shares launch into orbit. Take a look at investment guru Warren Buffetts' Berkshire Hathaway. Buffett purchased Coca-Cola (NYSE: KO) in 1988 when the stock was valued at around $2 per share. Shares then shot up to over $42 within 10 years, and it is just now returning to that high. Buffett's investment of $1 billion in the company about 25 years ago has turned into $10 billion. He still owns the same shares he purchased in 1988. So while Coca-Cola's price hasn't realized the same highs it did 15 years ago, Coca-Cola is still a knock-out for Buffett and any investor savvy enough to get in on the stock at the right time. There's no telling where the stock will go next, but a company as solid as Coca-Cola will likely realize more highs, and that's why Buffett is holding on. The buy and hold strategy works when it is applied to companies that are solid -- particularly when they pay steady dividends.
But what about that book?
Still, there are those who argue that buy and hold is dead. In fact, I suppose anyone taking the advice of the book Buy and Hold is Dead touts active investment management. That sounds like a lot of unnecessary work to me. After all, savvy investors know the company they buy, and they can tell after a thorough analysis which businesses will continue to profit far down the road. I'm not necessarily talking about 25 years, like Buffett with Coca-Cola -- though that's not a bad idea either. A minimum of five years is a fair timeline to give yourself with a buy-and-hold investment. While I can't help but take a look at company news, particularly quarterly and annual reports, it's also okay to ignore your investments and come back to them years later. Coca-Cola will still be here, for example.
What's that you say, ignore my investments?
The frequency with which you check your investment should depend on the stock. Typically, large cap stocks in sectors with limited competition are better designed for this approach. The sector is very important, because if you used the buy-and-hold approach with Microsoft (NASDAQ: MSFT) and bought when the stock was priced near $60 per share in 1999, and held it to its current range of $29, you would be disappointed to say the least.
Microsoft was at one time alone at the top of the computer industry, and is still the world's largest software company. I'm not completely writing Microsoft off. In fact, on April 16, it announced that it will cut prices to host and process customers' data, representing a play in the growing world of cloud computing. But let's face it, Microsoft likely didn't see Apple's resurrection coming. In the same time period that Microsoft shares fell from $60 to $29, Apple has taken off, going from around $30 to more than $700. Apple is now firmly established as the computing titan.
So while the buy-and-hold strategy can work in many cases, it is important to know the industry in which you are investing. Buffett knew that Coca-Cola was a solid company in 1988, and that it still is. The business was able to diversify its product range over the years to keep profits up. Buy and hold works in most industries, but know the company in which you invest before using this strategy. Even the investment guru Buffett stays out of technology stocks because, as he puts it, he doesn't understand them. Given the jostling for computer supremacy, I think he's onto something.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!