Beware of 'X Investing Theory Is Dead' Proclamations

"Buy and Hold Is Dead": I've been hearing this a ton lately. Problem with the statement is it takes a blanket approach and doing that in anything, is wrong. Those who typically espouse it say that the S&P 500 has done a round trip over the past decade so those who "bought it" have made no money. But, do most of us "buy the S&P"? No one I know does.

I'm going to take a look at the longest holding I ever had...Altria (MO), that I sold last December. I bought it in late 1999 in the midst of the "Master Settlement" and Chapter 11 fears for them. The buying thesis was simple:

1- Addicts will buy their products
2- They can't go Chapter 11 because those suing them (States) need the money they provide
3- Because of that, their long term health was assured.

The purchase price for Altria was $21.65 a share and when I sold it was $16.75. In addition to that, I received $21 a share in the Kraft (KFT) spin-off (sold immediately), $48 a share in Phillip Morris International (PM) shares (still held and today worth $42).

Oh, and over the 9 years I held it I received $23.25 a share in dividends.

Here is a 10-yr. chart of Altria. (Click to enlarge)
Now the temptation would have been to dump it in 2003 as it fell and then even again in 2004 as it dipped. But why? Just because the price fell?

Questions to have asked yourself then:

• Were the fundamentals of the tobacco business impaired?
• Did the legal environment deteriorate?
• Did management do something that changed the earnings profile of the company in a negative way?

The answer to all of those questions was no and in reality the legal environment improved steadily in those years to the point then CEO Camilleri said prior to the PM spin, "the current legal environment is the best we have seen it in years".

So in 9 years here is the tally:


That is a 18% annual return over those 9 years for doing...nothing...

A very similar scenario has unfolded with McDonald's (MCD) since I first bought during the "Mad Cow" scare. While not as extreme, and I did make the HUGE mistake of selling Chipolte (CMG) shares when I received them in the spin, it has been a fantastic investment.

Has the market done a round trip in the past decade? Yes. There plenty of companies who over that time have gone up/down and then back to start. BUT, if you buy it low enough and pay attention to its business environment / prospects to determine your selling time, you can avoid many of the losses.

Altria's business environment never deteriorated over the 9 years and in fact dramatically improved over where it was at purchase. I sold it in December because I felt that changed and PM International has a superior one. The same can be said of McDonald's, its environment is still improving with its very successful move into coffee and consumer trade to value.

Have I missed any? Sure. Dow Chemical (DOW) comes to mind. I got caught up in the Rohm & Haas / Kuwait deals and their potential benefits while the surrounding business climate deteriorated. The stock fell to a low of $6 from $50s in 2005 (my original cost was $26 in 2002). While I lost a bunch of unrealized profits, between $8 and $9 in March of this year I was able to lower my cost basis to $14 with several purchases. Again, when we add in $9.32 in dividends received since 2002, we are still up nicely, although not nearly as much as before... not nearly.

Am I selling Dow now? No. The Rohm deal is done and the business environment, while I missed the downside, looks to improve going forward. This will still turn out just fine eventually in my opinion, it will just take some time. We'll see...

Beware of "X investing theory is dead" proclamations. There are plenty of value folks who do great, plenty of day traders who do great and plenty of swing / momentum ones that do very well, while there are also plenty of all three that do awfully.

Find good ones in the style that fits you and get to know them. Blogs & twitter allow unprecedented communications between investors, take advantage of it.


Disclosure: Long PM, MCD, DOW

Comments

[Aki Izayoi:]

Buy and hold is dead for most people... most people cannot analyze securities and extract alpha in the way Warren Buffett can.

Buy and hold only works if you have an information edge or a good understanding of the fundamentals of business. That way would would not be forced to sell if you have an appropriate position size and leverage.

Jun 28 04:29 AM

[Roger Knights:]

What the author did was buy for the long term, not buy for eternity. (He sold his holdings when the fundamentals changed, or the stock was over-priced.) And he didn't buy the market, he was selective.

"Buy and hold" has a connotation of buying an index fund and holding it until ones death or disability. That's not a good idea.

Jun 28 04:34 AM

[sticktoitiv...:]

"Those who typically espouse it say that the S&P 500 has done a round trip over the past decade so those who "bought it" have made no money. But, do most of us "buy the S&P"? No one I know does"

You know their are people out their who follow people like David Bach, who actually do that. Scary stuff!

Jun 28 06:00 AM

[max12345:]

"Beware of "X investing theory is dead" proclamations. There are plenty of value folks who do great, plenty of day traders who do great and plenty of swing / momentum ones that do very well, while there are also plenty of all three that do awfully"

The above is ALL undoubtedly correct and amply confirmed by the empirical evidence. (namely by the actual experience of real people who have done great or awfully) But the "really key" theoretical and practical issue is how to be one of the ones who does well and NOT one of the ones who does awfully - in any of the three (or other hybrid) categories.

And a related question is which of the three approaches (when played well) is more likely to succeed (win big or win even just a little bit) and in what specific ways? (that is, by Doing X and not Doing Y)

And a third related question is how does anyone who would like to answer some of the above questions (other than by figuring out the answers on his -or her- own the hard way) do that without reading one hundred thousand financial advice books and articles per day and sifting all the various chaff from the various (divergent) wheat.

Not to mention dutifully watching CNBC and Bloomberg 24/7 and reading every single Seeking Alpha article that ever comes out. (as well as the archives of course)

Leaving that hapless soul roughly 1 minute per night to sleep and only about 30 seconds per day to make his by then "extremely wise and well informed" investment decisions and "sure fire" trades.

Information overload and sifting wheat from chaff now having become one of the main problems of those living (or trying to live) new Internet-based (or "Internet-enhanced") lives.

And now also add Twitter to that and attempting to faithfully follow about 1 million (as a minimum) people and their assorted tweets (or twits) and blogs...and one has a true and authentic formula for true and authentic WEALTH!

Which is also why in the end it's "really" the philosophical questions (and not only the theoretical or practical ones) which are by far the most difficult to try to answer (and also the most "wealth enhancing" if one gets them right)

Jun 28 09:26 AM

[BlueOkie:]

Notice both stocks mentioned were dividend stocks! That's the buy and hold segment in my opinion. Throw in a TSLO of 10% and one should be fine.

Jun 28 09:29 AM

[Old Trader:]

This article reinforces the studies that have shown that something like 65% of a stock's returns come from dividends, over a longer time frame. I'd agree with those who say "buy and hold" doesn't mean "buy and hold forever"

Jun 28 03:05 PM

[berloe:]

Wow! I hope all those once wonderful fund sponsors I invested in to "buy and hold" read this posting. They, just like the S&P, did a decade long round trip. HMMM. Why did I pay them for that trip?

Jun 28 06:48 PM

[Jake2:]

Buy and hold on to your hat! In a world of scarce resources, money being the scarcest of all, your "philosphy" is problematic at best.

Jun 29 01:07 AM

[jayminho:]

buy and hold is dead for those lunatic addicts that preach etf is the only salvation. poor them, who cant see beyond; etf has become the new cocaine of wall st. its trendy, fast, cool, you do there, you do here.. dont leave traces (no double meaning here) take the profits.. uhuu what trip.. go back again.. sooner or later pal, you get screwd.
inversed etf, levareged inverse, 3x this.. 3x that, 3x inversed..
gosh. and they, preach, preach, preach, like good sellers they are, they come close to even, convince me. fortunatly, i didnt buy into that hype, etf's are scams, etf's are more than proved to me a mass destruction weapon, where the only gainer is the dealer, sorry, I mean.. the guys who issue this stuffs.
long live buy and hold, long live to stocks.

Jun 29 02:46 AM