Buy and Hold Is Alive and Well

Every time the United States goes through a recession, the pundits all race to be the first to proclaim that “Buy and Hold” is dead. I can’t watch a financial news channel or read a financial website without some mention of this proclamation. Well I’m growing tired of it, and if it were up to me, I’d prohibit anyone else from making this point for the rest of 2009.

Buy and Hold is not dead, and I’m on a mission to prove it. Buy and Hold has worked brilliantly for decades, and it will continue to do so in the future. The stock you bought in 2007 is worth less now than what you bought it for? Oh boohoo, go cry me a river…somewhere else. The economy has peaks and troughs, and we’re in the middle of one of the more serious troughs since the Great Depression.

The pundits will claim that you can’t buy a stock in year X, leave it alone, and sell it many years later in year Y for a profit. These people cherry pick companies to make their points. They find the few companies in the US economy that have failed so miserably that you’d think they were run by the very same people who run the Social Security Administration. General Motors (GM) is a favorite, along with General Electric (GE) (which is a misnomer, as we’ll prove below).

To prove that Buy and Hold is not dead, I logged onto Yahoo! Finance and randomly selected 35 components of the S&P 500. I reviewed these companies’ 20-year returns from May 21, 1989 through May 21, 2009. I selected the following companies:

• Vulcan Materials (VMC),
• Applied Materials (AMAT)
• General Electric (GE)
• Reynolds American (RAI)
• Deere & Co. (DE)
• Freeport McMoran (FCX)
• Zion’s Bancorp (ZION)
• Home Depot (HD)
• Coca-Cola (KO)
• Halliburton (HAL)
• Alcoa (AA)
• Apple (AAPL)
• Microsoft (MSFT)
• Archer Daniels Midland (ADM)
• Pepsi Bottling Group (PBG)
• Johnson & Johnson (JNJ)
• Consolidated Edison (ED)
• Oracle (ORCL)
• Target (TGT)
• AT&T (T)
• IBM (IBM)
• Wal Mart (WMT)
• Pfizer (PFE)
• Boeing (BA)
• Goldman Sachs (GS)
• Union Pacific (UNP)
• Qualcomm (QCOM)
• Conagra Foods (CAG)
• Schwab (SCHW)
• Gannett (GCI)
• Newmont Mining (NEM)
• Loews (L)
• NVR (NVR)
• Bank of America (BAC)
• United Tech (UTX)

Before continuing, go ahead and guess how many of these companies currently trade lower than they did in 1989. Five? Ten? Fifteen? Nope, wrong!

Of our sample of 35 companies, only one finished lower over this 20-year period, Gannett. Gannett was off nearly 50% from its 5/21/89 price. Compare this to several companies like Microsoft and Oracle which were up approximately 5,000% over the same period. Even General Electric’s stock price increased since 1989 by a whopping 403%.

This sample is less than 10% of the overall population, but I believe that others would find similar results if running the same random sampling techniques. Very few companies have seen losses over a 20-year period.

After running this analysis, I still wasn’t happy, so I pulled ten of these stocks (including Gannett) into one portfolio (each at 10%) and reviewed how the portfolio would perform over the same period. I chose Microsoft, United Tech, ConEdison, General Electric, IBM, Conagra, Gannett, Loews, Schwab, and Bank of America. Creating this portfolio in 1989 and leaving it alone until 2009 would have yielded 403%, compared to the S&P 500 return of 177%.

403% is an outlier, and we’d expect a combination of this and other analyses to bring the average to the historical return of the S&P 500, but this analysis is sufficient to prove our point that buying and holding a diversified portfolio of 10-15 stocks within different industries will provide long-term investors with a comfortable investment.

I’d like to stress that it would take a diversified portfolio to achieve these results. Buying and holding one or two stocks leaves you open to substantial and reckless risk.

This takes us to our next point. The average American doesn’t need to get bogged down by spending hours upon hours deciding which 10-15 stocks to hold, and whether they’re all in different industries. Simply investing in a few well diversified mutual funds or exchange traded funds (ETFs), especially those that track a well-known index, will provide the average investor with a solid long-term return.

It’s not very difficult to Buy and Hold and make money, but these pundits write and talk on newspapers and TV shows about the death of Buy and Hold in such a frightening manner that regular investors panic and abandon this strategy. These investors then either attempt to time the market with little knowledge of how markets work, or simply avoid the market altogether and invest their money in 2.00% CDs for the rest of their lives. This is a big mistake, since there hasn’t been a single 30-year period where the S&P 500 has lost value.

If you’re reading this and aren’t sure where to put your money, stick it in a few low cost mutual funds or ETFs that track major indices like the S&P 500, Russell 2000, or MSCI Emerging Markets Index and leave it alone. If you have a little more interest in the market, go ahead and piece together that diversified stock portfolio. These pundits are wrong. Buying and holding is alive and well, and as long as the US and world economies continue to grow, you’ll see your portfolio grow along with them.

-Nick Klein

Disclaimer: The author is long KO, ED, MSFT, and JNJ.

Comments

[bartpr:]

bear markets have moves in excess of 50% in history. in fact the average recovery from an excess of 45% drop for the last 100 years
has been 60%. we are IMO in year 9 of an average 16 year bear which has yet to play out as ground for a new bull. this is according
to studies by gail dudak, former wall street week regular.

what does this mean. the market will not see a new advance to 1500 of the spy for many years. my position is: i will wait out the results of this stimulus then get out entirely until after 2015.

buy and hold means hold your profits and then see them evaporate
when the next slide comes. no thanks.

May 28 08:21 AM

[TrendRida:]

For the most part, an investor doesn't pick which year that they start investing. If you graduated in 2000 and had a few bucks - you started investing in 2000. Now you are praying that your failed buy and hold strategy will pay off if you hold another 10 years. What if it doesn't? How long are you willing to wait? What if you retired in 2008? Don't have much time to make up for that haircut.

The market should be bought and sold not bought and held.

May 28 08:29 AM

[TrendRida:]

The Buy and Hold Fairy :
www.thetimeandmoneyrep.../

May 28 08:36 AM

[captainccs:]

>>>Well I’m growing tired of it, and if it were up to me, I’d prohibit anyone else from making this point for the rest of 2009.

You would probably also abolish free speech and the rest of the Constitution. Oh well... If you are tired, take a nap!

If the market tanks by 50% then 50% of your stock market wealth has disappeared down a rat hole. It might or might not come back. If you had GBLX you faced bankruptcy. GBLX never bounced back. If you had Bear Stearns you got a $10 pittance from the US taxpayer courtesy of the NY Fed. What is so wrong about protecting yourself from these misadventures?

Just because you and Buffett like LTBH does not mean that this is the obligatory way to put your money in the market. Some people (not me) make money by doing the opposite, shorting!

May 28 08:58 AM

[Common Cents:]

I'm not in favor of "active" trading, but you have to do much, much better than this analysis to "justify" buy and hold to me.

When "randomly" selecting these stocks in 1989....
Would many of these stocks even have been in the S&P 500 at that time.?
MSft - hmm...did you have a pc? use Windows/Office in1989?
Oracle--hmm- weren't they in the midst of accting scandals then? Wmt - was there one on every major corner, selling groceries in 1989?
Schwab - in 1989, online/discount brokerage must have seemed like a "safe" investment
Qcom - how often did you use your "cell" phone in 1989?

I'm also glad you didn't "randomly" include any great American companies of the 1989 era in your analysis such as ....Enron, Xerox, Kodak, Worldcom, Lehman Bros, AIG, Ford, etc, etc.

Your data seems to justify good stock picking. It does not support your conclusion to "buy and hold" an index.

May 28 09:01 AM

[mr freddo:]

Buy and hold is really the only sane approach for most investors. The alternative, buy, sell, buy, sell, will leave the vast majority of investors with losses. In addition, with a buy and hold strategy, you can turn off Cramer and Fast Money and start reading some good books.

If you are still employed, the best way to invest is to commit to buying index funds and ETF's every month and then concentrate on keeping your job, cutting your costs, and enjoying your precious family.

May 28 11:41 AM

[R0B50:]

Wrong site to make this article as you will never find normal investors here.
Shorts only.
They should change the name of the website to something like webebearshere.com

May 28 11:49 AM

[thiazole:]

I don't know too many people who graduated in 2000 and retired in 2008. I finished college in 1999 and waited to invest until 2002 just because the bubble seemed pretty obvious. Maybe I'm the exception, but even if I did start investing in 1999, my salary then was about 1/3 what it is now, so what I would have invested then would be small compared to what I invested at cheaper prices later.

If you were planning to retire in 2008, I'd hope you started moving significant amounts of your portfolio out of the stock market before 2000.


On May 28 08:29 AM TrendRida wrote:

> For the most part, an investor doesn't pick which year that they
> start investing. If you graduated in 2000 and had a few bucks - you
> started investing in 2000. Now you are praying that your failed buy
> and hold strategy will pay off if you hold another 10 years. What
> if it doesn't? How long are you willing to wait? What if you retired
> in 2008? Don't have much time to make up for that haircut.
>
> The market should be bought and sold not bought and held.

May 28 02:19 PM

[Caltorguy:]

It's pretty hard to argue with the Dow that went from 41 in 1933 to 10,000 in 1999 - that's a 25,000% return, not including dividends (which average, I believe, about 3%, which probably what a bank deposit would have paid, so the 25,000% was really just very rich gravy...). Even if you look at a period like 1972 to 82, juicy yields on good stocks would have ensured a positive return.

May 28 02:43 PM

[FRANJUST62@...:]

The one consideration to the pros/cons of holding is if as an investor and you utilize a brokerage company every move you make cost you money. Money that you can never recover if you sell below your original cost. So hold and better still those of us who have all these companies with dividends you bet you are going to hold and hold and hold.

May 28 03:49 PM

[TrendRida:]

> I don't know too many people who graduated in 2000 and retired in 2008.

I made two separate points:

1) Suppose you graduated in 2000 and started investing in 2000.
2) Suppose a person was scheduled to retire in 2008 with the market taking a 40% bath.

Life cycle funds that are suppose to reallocate your assets the closer you get to retirement were down 25-35% last year.

My overall point is buy and hold with a plan to sell at some arbitrary date in the future is a flawed strategy. The market could care less when you plan to retire, buy a house, fund a child's education or any anything else.


On May 28 02:19 PM thiazole wrote:

> I don't know too many people who graduated in 2000 and retired in
> 2008. I finished college in 1999 and waited to invest until 2002
> just because the bubble seemed pretty obvious. Maybe I'm the exception,
> but even if I did start investing in 1999, my salary then was about
> 1/3 what it is now, so what I would have invested then would be small
> compared to what I invested at cheaper prices later.
>
> If you were planning to retire in 2008, I'd hope you started moving
> significant amounts of your portfolio out of the stock market before
> 2000.

May 28 04:04 PM

[Gyoza Mimi:]

Were Microsoft and Oracle part of S&P500 in 1989? What about other random companies, like GM, Chrysler?

May 28 05:42 PM

[Teak:]

Buy and Hold makes sense if you buy solid dividend-paying companies that will be around and paying dividends in the future. When their prices go down (and stay down), the dollar-cost averaging of a growing dividend payment, reinvested, works in your favor.

If you plan on trying to live off the dividend stream, then there is no point in worrying about the price going up; in fact, you don't want to the price to race up. My hope (plan) is that my children will inherit my shares after I use the dividend stream for retirement income. Isn't this what investing in companies is supposed to be about?

If I started my own company, I wouldn't sell it, buy it back, sell it, buy it back, etc. ad nauseum. I would own the business long-term and trust that it would give me an income stream long-term. It is this craziness surrounding day-trading, week-trading, month-trading that makes for the silly up-and-down price movements. The price of xxx goes up Monday 1%; it falls 1% on Tuesday; it goes up on Wednesday, falls on Thursday; retraces on Friday. Back to square one. Did the business really change that much in one week??

May 28 10:20 PM

[Oh Blah Dee...:]

Okay, but what about those people that did their homework and bought companies with "implied" U.S. Government backing, such as Fannie Mae (FNE), Freddie Mac FRE, or bought the biggest insurer in the world AIG, or the biggest U.S. automobile dealer, General Motors (GM)?

Or, the biggest software company in the world in 2000, Microsoft (MSFT)? MSFT has done NOTHING for 8 years.

The fact is even the Dow Jones drops and adds companies at times, and so should investors. Those that retired, or were about to retire, saw their equity portfolios devastated when they have the least ability to earn a living to replenish there capital, and had little or no means to take advantage of the severe market decline.

Buy and Hold is good in a rising market, and a rising market makes every investor look like a genius.

May 29 08:23 AM

[Oh Blah Dee...:]

CORRECTED:

Okay, but what about those people that did their homework and bought companies with "implied" U.S. Government backing, such as Fannie Mae (FNE), Freddie Mac (FRE), or bought the biggest insurer in the world, American International Group (AIG), or the biggest U.S. automobile dealer, General Motors (GM)?

Or, bought the biggest software company in the world in 2000, Microsoft (MSFT)? Unfortunately, MSFT has done NOTHING for 8 years.

The above are, or were, very big, well-known companies. Markets change, technologies sweep away earlier companies, and companies make major errors in the marketplace.

The fact is even the Dow Jones drops and adds companies at times, and so should investors. Investors that retired, or were about to retire, saw their equity portfolios devastated, when they have the least ability to earn a living to replenish their capital, and had little or no means to take advantage of the severe market decline.

Buy and Hold is good in a rising market, and a rising market makes every investor look like a GENIUS.

May 29 08:29 AM

[buoy:]

Buying stocks is like riding the bus. Some people get off at the next stop, and some ride till the end of the line. So what.

May 29 09:31 AM

[Dave Shafer:]

I wonder about people who say you can turn your brain off when investing. Buy and hold; yes individual companies that you check on periodically to make sure nothing in your initial analysis has changed to the worse! Buy and hold index funds? No. at least how it is usually done which is to dollar cost average in. You end up buying stocks when they are expensive. Buy and hold is not the same as buy and forget or buy and turn your brain off!

May 29 11:38 AM

[Tony Daltorio:]

You would have made a stronger argument if you would have included bear market years - say take the 20 yr period from 1969 to 1989. Financial market history did not just begin with the advent of the bull market in the early 80s.

May 29 02:04 PM

[RLLH:]

I invested in each of 5 mutual funds in 1986 and have held them ever since. I tested your hypothesis and found:
Acorn Fund 1010% increase
Evergreen 480% (split into 2 funds in 90's)
Partners Fund 490%
Nicholas Fund 360%
Valley Forge 280%
--------------
528% average increase

Could I have done better by buying and selling? Perhaps, but it was nice to know that while I was playing with stocks on my own, these funds have continued to steadily increase (although obviously down considerably over what they would have been last year at this time.)

May 29 02:35 PM

[Mayascribe:]

Finally! Someone here at Seeking Alpha has written an article about how buy and hold is NOT DEAD!

Several times I posted comments to articles written opposing this sheeple-fied mindset that this is a traders market, with such thoughts as to why I in the world would I sell my $1.87 shares of Jaguar Mining (JAG) now $8.93, or Exide (XIDE) @ $1.91 now $6.10, or GE @ $9.57 now $13.48, or ATP Oil and Gas (ATPG) $4.21 now $9.05, or Tech Cominco shares I bought @ $4.61 now $15.83!

And then there's those Bank of America $3.57 shares and Wells Fargo shares I picked up for under $9.00.

The above stock purchases proves to me that Buy and Hold is most definitely not dead. Those who think otherwise are just not seeing what I'm seeing...

...Or, they work for CNBC whose producers love a volatile market for ratings, or their employed trading chatterheads who covet a traders volatile market.

So often, in other stocks, I've listened to these CNBC "experts" and took profits from other stocks I own(ed), only to see the stock rocket up so fast I couldn't figure out when to get back in, as in now I only own 100 shares of A Power Genration Systems that I bought for $3.14. Those shares are up over 250%, and I still can't figure when to get back in.

I repeat, Buy and Hold is NOT DEAD!

May 29 04:41 PM

[YoYoMama:]

Buy and hold is DEAD!! Buy and hold is NOT DEAD!!

Oh, geez, will someone please stop the see-saw, I wanna get off!

Folks, just do what works for you and ignore these types of articles.

May 29 06:17 PM

[effiiciency:]

I can't pass this one up. In 1949, after 15 years of lobbying, the NYSE specialist en masse became expempt from Federal Reserve Regulations 'T" and "U".

This brought about several advantages, one being a tax-segregated omnibus account. That intrument ushered in the 1949-1966 bull market.

Point being.................... and hold works as "long" as you're aligned with the specialist (and willing to contend with his day to day inventory adjustments as well as his other role of maintaining a "fair and orderly" market. In essence, he can be long and short simultaneously.

That said, when he pulls the plug (matures the omnibus account and pays his capital gains) probably due to either a lack of alibis to move paper further OR he's sold out and postured to go net short on an alibi (such as Bear Stearns or Lehman Bros), then the word "humbled" is re-defined.

The specialist is THEE entity most married to a given stock. CEO's come and go but "he's" perpetual.

KO matured long ago. 1997. All you need to do is simply look at a long term (20 year) chart.

As a special sidenote, there is indeed a PPT, but it operates in the futures market, hardly all issues, and runs counter TO the specialst who deals in the acutal paper. DAILY. Perpetually.

May 29 07:17 PM

[trac16cat:]

The pundits live and die by the trade. Of course they don't want you to "buy and hold."
Solid companies weather being in favored and unfavorable industries, and they have to out perform inflation to make a profit,
Being in a fund averages out more of your risk.
When you buy a stock, the market does everything it can to scare you out of it at a loss. Time will allow you to average down and make money.
Do your homework and go with your gut feeling.

May 30 10:28 AM

[Pau:]

Nick ~ Your 'research' here suffers badly from survivorship bias. During the period you selected, there were more than 200 (!) deletions from the S&P 500 -- with roughly a third of these not satisfying the share price, liquidity, market capitalization, company fundamentals or other index criteria. A Monte Carlo study of 35 randomly selected stocks from 1989 S&P 500 components would produce a staggeringly huge distribution of possible returns. Of course, it would also often result in holding far fewer than 35 stocks at the end of the period, adding additional risk...

Jul 23 04:23 PM