"Why Buy and Hold is an Inferior Strategy"

[DTEJD1997]

Hey all:

 

Wow, Buffet admitted he made a mistake on Coke.  If I remember correct, Coke's NORMALIZED P/E got into the 40's, perhaps even the 50's.

 

That is WAY overvalued by ANY objective valuation metric.  I don't care how great a company it is.  The clear decision should have been to sell it.

 

You can't just buy & hold forever.  If it is cheap buy more, fairly valued? hold, grossly overvalued?  SELL.

 

I understand when you are talking investments that are 9 figures in size, moving in & out is a concern, and you should not do it lightly.  Where did Buffet think KO was going to go?  It is such a good company it should trade for a 70X P/E?  Or maybe that Coke was going to have some explosive growth ahead of it?

 

It just shows that there is a time to sell for anything....

[savant]

Hey all:

 

Wow, Buffet admitted he made a mistake on Coke.  If I remember correct, Coke's NORMALIZED P/E got into the 40's, perhaps even the 50's.

 

That is WAY overvalued by ANY objective valuation metric.  I don't care how great a company it is.  The clear decision should have been to sell it.

 

You can't just buy & hold forever.  If it is cheap buy more, fairly valued? hold, grossly overvalued?  SELL.

 

I understand when you are talking investments that are 9 figures in size, moving in & out is a concern, and you should not do it lightly.  Where did Buffet think KO was going to go?  It is such a good company it should trade for a 70X P/E?  Or maybe that Coke was going to have some explosive growth ahead of it?

 

It just shows that there is a time to sell for anything....

 

He hedged his position in Coke by exchanging Berkshire stock trading way over book value (even including market cap of value of KO stock) for GenRe stock along with its portfolio of bonds. He avoided having to sell a great business with hopes of getting it cheaper in the future and any pressure on KO stock that would have occurred if its largest stockholder began dumping the stock in the market.

Plus, Berkshire's insurance business generates float at 0% cost (at worst) and holding a 2.5% guaranteed return growing at inflation is not a bad bet.

 

[Partner24]

Every single share that I own can be for sale. That being said, I do not sell cheap  ;)

 

You can buy things you plan to own for a very long period of time (FFH, MKL, etc.) because you think they'll do well for the long run, but in the end if the price become too high I would sell them in the hope that they would go back to good prices in the not too distant future. None of the businesses that I own shares are in that price range, so in the meantime, they keep compounding their instrinsic value per share and I'm a happy owner.

 

So all that being said, I think that buy and hold fundamental investing approach is a far more succesful (and lousy) way to make money than to trade frequently It's very easy to think that you can time the market and make stupid decisions. Like Warren used to quote in it's annual chairman letters:

 

All men's miseries derive from not being able to sit in a quiet room alone

Blaise Pascal

 

Cheers!

 

 

 

 

 

[Yours Truly]

It depends on the individual's temperment and personality... but for me, I prefer buying and holding small cap growth stocks that have the potential to be 100+ baggers

[Palantir]

^What's in your wallet?

[ourkid8]

Tobacco companies in general never really trade at a significant premium as there are a large number of institutional and individual investors who would never invest in them for moral and ethical reasons.  I stand corrected as if PM sold for 45x earnings I would definitely sell as it would be extremely difficult to hold it at that valuation.  Otherwise, this is a lifetime position which will continue to compound at an obscene rate.

 

S

 

I am going to go on a limb and disagree with most of you guys as it really depends on the company. (I have to admit, these types of companies are EXTREMELY rare and when you find them to buy as much as you can)  There are some companies that have all the necessary characteristics to buy and hold for life and you will be extremely well compensated.  (Strong moat, pricing power, low capex, strong FCF generation, all cash being returned to shareholders etc...) The company in my portfolio that does not only meet but exceeds all those characteristics is Philip Morris International.  This was spun-off from Altria (Mo) and it has been arguably one of the greatest investments to buy and hold forever.  Take a look at their returns for the last 50 years and we should have similar returns for the next 50 years. 

 

Thanks,

S

 

Would you hold PM if it went to 45x earnings?

 

Nobody thought KO was going to trade at 45x earnings, so they didn't need to worry about valuation, but it did.

[Kiltacular]

For a naive person, buy and hold of consumer staples is the best strategy.

 

+10,000%...and one might even be able to drop the opening clause.

[SharperDingaan]

Most of you are missing the entire thrust of Buy and Hold:

 

If you buy an equity today, that consistently pays a growing dividend over time, three things will happen. (1) The cash yield (Dividend/Purchase Price) will grow over time (2) Inflation will maintain your purchasing power by increasing the share price, & your dividend (3) The longer you keep the equity, the more reliable (1) and (2). Essentially, no think risk management.

 

If you buy a dividend paying XYZ at age 20. It is highly likely that by age 60 (40 year holding period) your cash yield on XYZ will be so high that it repays the investment every 1-2 years, you will have a cash flow that you can live off, and an investment worth many times what you paid for it - if you ever need to sell. Zero need for a financial adviser, & you would essentially eliminate most of today's services provided by the wealth management industry.

 

Moat, management, etc is just the DD necessary to assure yourself that XYZ is probably still going to be around, and paying a growing dividend, over the planned holding period. 

 

SD

 

 

 

 

[constructive]

Most of you are missing the entire thrust of Buy and Hold:

 

If you buy an equity today, that consistently pays a growing dividend over time, three things will happen. (1) The cash yield (Dividend/Purchase Price) will grow over time (2) Inflation will maintain your purchasing power by increasing the share price, & your dividend (3) The longer you keep the equity, the more reliable (1) and (2). Essentially, no think risk management.

 

If you buy a dividend paying XYZ at age 20. It is highly likely that by age 60 (40 year holding period) your cash yield on XYZ will be so high that it repays the investment every 1-2 years, you will have a cash flow that you can live off, and an investment worth many times what you paid for it - if you ever need to sell. Zero need for a financial adviser, & you would essentially eliminate most of today's services provided by the wealth management industry.

 

Moat, management, etc is just the DD necessary to assure yourself that XYZ is probably still going to be around, and paying a growing dividend, over the planned holding period. 

 

SD

 

 

 

What percent of stocks beat the market over 40 years?

 

You have to be in the top 10% of investors to apply a strategy that selects the top 10% of stocks. People are not born knowing how to select good dividend growth companies, they have to learn.

[mikazo]

Most of you are missing the entire thrust of Buy and Hold:

 

If you buy an equity today, that consistently pays a growing dividend over time, three things will happen. (1) The cash yield (Dividend/Purchase Price) will grow over time (2) Inflation will maintain your purchasing power by increasing the share price, & your dividend (3) The longer you keep the equity, the more reliable (1) and (2). Essentially, no think risk management.

 

If you buy a dividend paying XYZ at age 20. It is highly likely that by age 60 (40 year holding period) your cash yield on XYZ will be so high that it repays the investment every 1-2 years, you will have a cash flow that you can live off, and an investment worth many times what you paid for it - if you ever need to sell. Zero need for a financial adviser, & you would essentially eliminate most of today's services provided by the wealth management industry.

 

Moat, management, etc is just the DD necessary to assure yourself that XYZ is probably still going to be around, and paying a growing dividend, over the planned holding period. 

 

SD

 

 

 

This is assuming that you're investing for income in the first place (which is a legitimate goal). But, Buffett teaches that he'd rather own companies that make more tax-efficient use of their free cash flow (i.e. not pay it out as dividends). In this case, total return from buy and hold becomes completely about capital gains.

[Guest hellsten]

Warren on wisdom of hindsight, selling, and buy and hold:

I probably came back on

that September day from unsuccessfully trying to sell some

prospect and decided - despite my already having more than 50% of

my net worth in GEICO - to load up further.  In any event, I

accumulated 350 shares of GEICO during the year, at a cost of

$10,282.  At yearend, this holding was worth $13,125, more than

65% of my net worth.

Alas, I sold my entire GEICO position in 1952 for $15,259,

primarily to switch into Western Insurance Securities.  This act

of infidelity can partially be excused by the fact that Western

was selling for slightly more than one times its current earnings,

a p/e ratio that for some reason caught my eye.  But in the next

20 years, the GEICO stock I sold grew in value to about $1.3

million, which taught me a lesson about the inadvisability of

selling a stake in an identifiably-wonderful company.

 

It would be interesting to know if GEICO was overvalued, as KO was in the late 1990s, at any point during those next 20 years after Warren sold GEICO.

[biaggio]

Warren on wisdom of hindsight, selling, and buy and hold:

I probably came back on

that September day from unsuccessfully trying to sell some

prospect and decided - despite my already having more than 50% of

my net worth in GEICO - to load up further.  In any event, I

accumulated 350 shares of GEICO during the year, at a cost of

$10,282.  At yearend, this holding was worth $13,125, more than

65% of my net worth.

Alas, I sold my entire GEICO position in 1952 for $15,259,

primarily to switch into Western Insurance Securities.  This act

of infidelity can partially be excused by the fact that Western

was selling for slightly more than one times its current earnings,

a p/e ratio that for some reason caught my eye.  But in the next

20 years, the GEICO stock I sold grew in value to about $1.3

million, which taught me a lesson about the inadvisability of

selling a stake in an identifiably-wonderful company.

 

It would be interesting to know if GEICO was overvalued, as KO was in the late 1990s, at any point during those next 20 years after Warren sold GEICO.

 

Thanks for posting quote from WEB.

 

I think that even if GEICO was overvalued, it was small enough to scale + grow over 100X over 20 years

=you can afford to overpay. i.e. if you overpay by 3-4 x intrinsic value and you make 20 x (by IV growing 100 fold over 20 years) that is still very good.

 

The problem with KO is size. How big can it get. You re potential upside is limited.

[SharperDingaan]

"You have to be in the top 10% of investors to apply a strategy that selects the top 10% of stocks"

 

No. You just have to be able to pick a good business; hence the DD requirement. Most folk will not do it though because they don't have the patience, or temperament.

 

"This is assuming that you're investing for income in the first place"

 

No. Dividends during the holding period are to ensure that you get your original investment back as soon as possible; risk reduction.

 

 

 

[Uccmal]

The conversation around Geico is assuming that it grew in a straight line.  It didn't.  Lorimer Davidson was still on the BOD when the CEO changed strategies and went into unprofitable business.  Buffett and John Gutfreund recapped Geico to keep it in business.  Would this have happened if Buffett remained a minor shareholder all along - we will never know - but we do know that Buffett has commented that a BOD usually has minimal impact on a CEOs actions.  My guess is he would have lost his entire investment unless he had taken a controlling interest. 

 

On the other side of the coin I have been slowly increasing my holding in Seaspan, on the dips, like yesterday.  I am anticipating living off of my investment income in the not too distant future.  I have held SSW since fall of 2008.  I bought RBS preferred shares at the bottom in 2009 and still hold them.  The principle has recovered, the dividend was re-instated.  Paying the capital gains tax makes no sense.  I also have a chunk of change in FFH still.  I will buy more, if/when it corrects down for some reason. 

 

My intention is to keep my WFC, convert my Leaps in 5 years.  Same with JPM.  I will also keep a small portion of my holdings in AIG, and BAC, when they reach a more sensible valuation.  This is after I have taken profits on the 80% of the rest of the positions in warrants and Leaps. 

 

Perhaps one day, bond yields will move North of 8% again, providing a good income source.

[mikazo]

"This is assuming that you're investing for income in the first place"

 

No. Dividends during the holding period are to ensure that you get your original investment back as soon as possible; risk reduction.

 

That's one legitimate reason to require dividends, to lower cost basis and eliminate market risk. Another reason could be to maintain a stable income over time. Personally, I don't give much weighting to dividends one way or the other, unless the payout ratio is super high (in which case I'd have concerns). The type of risk I'm more concerned with is business risk and capital allocation (or mis-allocation).

[DTEJD1997]

Ok Guys:

 

Here is one problem with a "forever" holding period.  This assumes you are not large enough to have an influence on management...

 

How many companies can you name that will/were good investments for 40 or 50 years? I can only think of a handful.

 

How many companies were good investments for 5, 10, or even 15 years?  There are probably too many to even name.

[SharperDingaan]

The reality is that most folks will be looking at 10-15 years maximum. They will be looking at Big Pharma, Big Oil, Big Consumer, Big Financials (Canada-Sched A's, LifeCo's, etc.), & Utilities. Each of these businesses is unlikely to entirely disappear within 15 years, & at an average 6.67% (100/15) cash yield, you will have your original investment back by the end of year 15.

 

A 6.67% cash yield is nothing special. You locked in a low cost price 15 years ago, buying on a dip, & dividends have successively increased since then. The cash yield was < 6.67% when you started, & > 6.67% when you finished.

 

Any business 10-15 years out is very different from what it was. 10-15 years out, most folks will also be increasing their asset allocation to prefs & bonds (assumes an older person), & looking to trim common equity; either by direct sale or derivative hedging.

 

And as most of financial services is transaction driven ... this is the last thing the industry wants everyone doing.

 

SD