Aren't You Glad You Held?

By Jon Quast - September 11, 2012 | Tickers: AAPL, BAC, CMG, NFLX, NES | 0 Comments

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There are many methods of investing in the stock market.  My favorite is the method known as "buy and hold."  The buy and hold method looks like this:

• look for solid companies poised for long-term growth
• buy into those companies (thinking five years or so ahead)
• hold those companies to realize steady returns on your investment

Your company will not be immune to swings in stock price.  And you must be tough to weather some storms you may encounter.  But the general long-term trend should be up for shares of a healthy company.

Holding Heckmann

When the Heckmann Corporation (NYSE: NES) got hammered a little while back for a discouraging quarterly report, I suggested that it was an opportunity to double down, or buy into Heckmann.  To me, things still looked fantastic for the long-term possibilities of the company.  It seemed like a classic case of market overreaction.

Many people saw Heckmann's report and drop in stock price the same way that I did:  as a chance to stay in, get in, or double down.  Many still believed in this company long-term.  One believer was Jim Cramer who refused to give up on the company despite his followers encouraging him to sell.  Cramer wouldn't.

To be sure, many people sold when the quarterly report was released.  The stock made a huge drop, and people jumped ship.  Looking back today, that was a terrible financial move.  After the news was released, the stock bottomed out at $2.60/share.  That was before the turnaround.  Currently, as I sit here and write this article, the stock is sitting at $4.24/share.  To be clear, I saw this as a buy and hold opportunity because I believe in the business, and didn't believe that anything significant had changed to cause me to sell.  The reason this stock is up right now is not a new improved quarterly report, but the news that Heckmann is merging with a group called Power Fuels.  This move allows Heckmann an even greater market share and increases their customer base.  I liked the long-term before; I really like it now.

Buy and Hold Past

Apple (NASDAQ: AAPL) was flying high back at the end of 2007.  The company's shares had touched the $200 mark and investors were pretty happy.  That was followed by a terrible year for the stock price, down over 50%.  Certainly many people jumped ship in the beginning of 2009, not being able to stomach the drop any further.  However, since the stock price bottomed out in early 2009, shares have gone on to see returns of over 600%.  You missed out if you sold.

Bank of America (NYSE: BAC) is a similar story (although there are a lot of differences).  If you sat and watched your $40/share investment dissolve to under $3/share in 2008, I'm sorry.  I'm right there with you.  I bought near the peak, and held all the way to the bottom.  Again, it was at the bottom a lot of people sold.  I hear you; stock prices still haven't come close to where they once were.  But, it's relevant to say that when the stock bottomed out, it was clear that the company was worth more than what they were valued at the time.  If you sold at the bottom, you missed out on the rebound that brought shares back into a more reasonably priced range.  It was still a loss, but not as bad as selling at the bottom.

Buy and Hold Present

I know that you're thinking that hindsight is 20/20.  I'm sure we can all think of companies that buying and holding only lost money for their investors.  The point I would like to make is this:  buying and holding doesn't mean you can't ever sell; you just need to only sell when there is ample reason for you to doubt the long-term prospects of the company.  With Apple, anyone could see in 2008 that this was a company still on the way up, even though stock price was down.  Bank of America was a different story.  It was clear that there was a storm brewing on the horizon.  I failed to heed the warning signs.  But after riding the fall to the bottom, it was also clear that under $3/share was a ridiculous price for this company.  I rode the price back up to reasonable.

Netflix (NASDAQ: NFLX) is a situation where it may be time to sell.  I have been bearish on Netflix ever since just before the Qwikster disaster last year.  As fellow fool blogger Andrés Cardenal points out, competition is getting fierce.  Pricing is getting harder each day.  Subscribers continue to pull out.  Real things have changed in Netflix's present day story, compared to where this company was five years ago.  These real reasons are strong reasons to get out.

Chipotle Mexican Grill (NYSE: CMG) has also experienced a drop in stock price of better than 25% from semi-recent highs.  Many investors have headed for the hills.  But this is a case where you need to have a cool head with a buy and hold strategy.  If you are down 25%, I'm sorry.  It hurts.  It's hard.  But nothing fundamentally has changed with Chipotle.  If you liked them before, you have every reason to still like them now.  This company, to me, will continue to serve their investors up with profits for the foreseeable future.

Conclusion

Buy and hold is one of the hardest strategies of investing in the stock market, because you have to take your emotions out of it.  With the stability of a Klingon, you must review tangible things with your companies, and decide whether or not they are poised for long-term growth.  Big dips always come.  We want to sell to avoid loss.  Big jumps always come.  We want to sell to lock-in profits.  But if we believe in these companies long-term, selling out only causes us to miss out.  I think that Heckmann and Chipotle are buy and holds.  Both may need to be sold someday, but that day is not today.

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