Buy and Hold Isn't Dead Yet

The long term, ten-year performance of the popular stock market averages has convinced many investors that buy and hold no longer works. The Dow Jones Industrial Average first touched 10,000 in March 1999. More than ten years later the venerable Dow is struggling to touch 10,000 again and is down 30% from its 2008 high. The Standard & Poor’s 500 stock index closed September 2009 down 17.5% from its close ten years earlier.

Clearly these broad stock market averages turned in a dismal and disappointing ten-year performance. Buying and holding a basket of stocks in either index did not live up to expectations. Adding in dividends helps to improve the numbers.

But still they can’t cover up the underlying facts. Stocks are supposed to produce decent capital gains without counting dividends. There are lots of individual companies that pay no dividends at all. The theory is that the company can make better use of the cash to grow the business sand improve the stock price. In the last ten years that has not always been the case.

Discouraged and disappointed, many investors have concluded that buying and holding stocks for the long run no longer produces profits. They have turned to active trading instead. All sorts of technical trading services have been developed to satisfy the surging demand for trading advice.

My problem is that I am not a very good trader even with modern technical help. Selling short makes me very nervous. Active trading produces too much paperwork and runs up the bill for tax return preparation.

Several decades ago I worked for Citibank (C) in Zurich Switzerland. In the office across the hall was the chief Swiss currency trader. He was enormously successful both in delivering profits for the bank and his personal portfolio. In the 1980s he left to form his own trading firm. He made a fortune for himself. He didn’t manage a hedge fund. He simply used lots of leverage and traded currencies. We were good friends and I learned a lot.

The most important lesson I learned is that trading is a very competitive activity. Traders pit their personal opinions against all the other players in every trade.I concluded that it takes a very special personality to be a successful trader. I also concluded that there are not that many such personalities in this world. Most traders do not amass large fortunes. Some go broke because of the leverage. Leverage is important. It transforms a small percentage move into a large gain, or loss.

Over the years I have watched as trading became ever more popular among individual investors. But I learned my lessons and understand that active trading is not the best investment strategy for me. I enjoy business. Following the stories of businesses as they struggle with competition, changing markets and politics is fascinating for me.

Late in the 1980s Louis Rukeyser invited me to become a panelist on his weekly television show Wall $treet Week with Louis Rukeyser. I accepted and served for more than a decade. At the beginning of every year Lou asked the panelists to submit a list of investments. Then at mid-year and year-end he would honor the winners on a special edition of the show. My version was to submit a top ten stock list every year. I managed to finish in the top three several times. I have continued the practice ever since.

My top ten selections for 2009 are:

Aetna, NYSE, AET, $27.83…… -2.4%

BP, NYSE, BP, $53.23…………. +13.9%

Cheesecake Factory, OTC, CAKE, $18.82….. +83.4%

Financial Select, NYSE, XLF, $14.94…. +19.3%

General Electric, NYSE, GE, $16.42….. +1.4%

GlaxoSmithKline, NYSE, GSK, $37.27… +6%

Halliburton, NYSE, HAL, $27.12…… +49.2%

Intel, NASDAQ, INTC, $19.57…… +33.5%

ishares MSCI Japan, NYSE, EWJ, $9.84…. +2.7%

Nokia, NYSE, NOK, $14.62…. -6.3%

(Stock prices as of the close on September 30, 2009)

The percentages show the gain or loss for each stock through September 30. Equally weighted, not counting dividends, the top ten gained 20.07% in the first nine months of 2009. The Dow Jones Industrial Average was up 10.7% and the S&P 500 gained 17% in the first nine months. My top ten did quite well by comparison. Buy and hold worked with these ten stocks over the nine months. Perhaps a skilled trader could have done better. But I am satisfied with a 20% gain in nine months.

Looking ahead to the final quarter of the year I have decided to make no changes. I will go with buy and hold for three more months.

Aetna is in the eye of the healthcare reform storm. But that is very well known, leaving room for an upside surprise if reform takes a positive turn.

BP has a major new oil find in the Gulf of Mexico, pays a good dividend and will benefit from a global recovery.

Cheesecake Factory is a very well run business. Management has cut costs and slimmed down the menu offerings. Customers have been responding well to the changes.

Financial stocks have a long way to go for a full recovery. This fund provides diversification and a good dividend.

General Electric has slimmed down its financing arm. Orders for aircraft engines and infrastructure products are rising nicely. Commercial real estate will remain a drag. But that is in the stock price. Any deal with Comcast over NBC media assets would be another plus. From here on surprises are likely to be on the upside.

Glaxo is strong in vaccines, has a new CEO, is making a push into emerging markets and provides a dividend yield of 4.7%. This stock can be over $40 by year end.

Halliburton is benefiting from an increase in onshore drilling activity in North America and from its Mideast headquarters. The stock is up nicely so far but can push somewhat higher in the next few months.

Intel is in a sweet spot with new chips, new partners and a likely pick up in PC sales. Microsoft’s Windows 7 looks poised to boost PC sales.

MSCI Japan focuses on large cap Japanese companies. They are doing better thanks to new growth in the Pacific Rim. A rise to $12-$14 over the next few months is possible.

Nokia is ready to hit on all cylinders again. Emerging markets are growing. Nokia’s efforts in notebooks, new applications, smart phones and software are bound to show positive results. Wall Street is too negative on Nokia.

Holding for a twelve month period does not mean holding forever. Holding to me means planning on keeping a stock at least long enough to qualify for a long term capital gain. It is always nice to find Warren Buffet type stocks that can be held for several years. Who knows? Maybe there is another long term hold among these ten. I hope so.

Full disclosure: Long AET, BP, CAKE, XLF, GE, GSK, HAL, INTC, EWJ & NOK.

Comments

[Respirate:]

I appreciate your low-risk buy and hold strategy. Thanks for sharing it.

I must question your choice of Aetna in your investment group. They may be profitable and investable (yes to both), but Aetna is the kind of health insurer you hope others do NOT emulate. As a healthcare administrator and provider I can say Aetna is the poster child for poor operational performance on behalf of both health providers and the insured. Just an ugly company to deal with - there are better choices in this sector.

I'd also suggest Conoco Philips COP as a well-run buy and hold substitute for BP. COP is poised to drastically increase earnings when NG demand rises in step with a gradually improving economy. COP recently announced a 6% increase to an already generous dividend, coupled with the sale of $10B of productive assets to improve its balance sheet.

Discl.: Long COP

Oct 08 07:31 AM

[user369285:]

What a nice surprise to find Mr. Dessauer on Seeking Alpha. My late husband and I attended one of his seminars in Switzerland many years ago. Having always valued his financial opinions, its like finding an old friend.

Oct 08 07:49 AM

[AndrewBaker:]

I admire the philosophy that goes with John's investment technique: in fact I admire it more than the technique. It suggests to me a stable person, happy with themselves and content to live their life as it is without worrying that they should be doing more or concerned about others who perhaps amass more (of whatever).

If I could be as content as that myself, maybe I would hold some of my stocks and securities longer, and have less to worry about in the process. Unfortunately, I'm not so relaxed; and I wish that I were.

I don't buy and hold, much; and wish you the best of fortune as much as for your philosophy as for the technique.

Oct 08 09:51 AM

[YoYoMama:]

I was buy-and-hold too, until November 2008. Now, I'm buy-and-watch-the-char... I will never be burned like that again.

Oct 08 10:14 AM

[YoYoMama:]

Geez, it cut me off. I'm now - buy and watch the charts (and my arse). You get the point.


On Oct 08 10:14 AM YoYoMama wrote:

> I was buy-and-hold too, until November 2008. Now, I'm buy-and-watch-the-char...
> I will never be burned like that again.

Oct 08 10:17 AM

[thiazole:]

Everybody buys and holds.... until they sell. Whether that time span is 1 year 10 years or 30 years, and whether you are buying during a secular bear or a secular bull all make a big difference to the outcome. My personal feeling is that when you are in the middle of a secular bear market as we are right now that buying and holding for 10 years is a waste - you could buy in 1965 and sell in 1982 and not only be WAY down after inflation, but even be down nominally. Why subject a portfolio to that? During a secular bear market, I buy recessions and sell recoveries (about a 1 - 2 year holding period). During a secular bull market, buying and holding 10+ years makes perfect sense, though.

Oct 08 10:53 AM

[thiazole:]

The link below should be a good read for you with the exception of "hiring an advisor" - personally I'd never trust my investment decisions with anyone else because I've seen plenty of financial advisors make rookie mistakes.

I also practice mental accounting and I have 4 separate investment accounts ranging in risk from very high to very low and I balance them so that I always keep a minimum (or maximum) balance in each (and when the riskiest account exceeds 10% of the total, I sell stock from it and rebalance it into the other accounts). tinyurl.com/y96teot


On Oct 08 10:17 AM YoYoMama wrote:

> Geez, it cut me off. I'm now - buy and watch the charts (and my arse).
> You get the point.

Oct 08 11:05 AM

[SivBum:]

If you put down $1 million in 1999 to buy S&P stocks and hold, you are much much much worst off than putting the $mil into real estate outside of Detroit. How's that a good thing?

Oct 08 11:08 AM

[Berninvestor:]

Excellent article Mr. Dessauer. I too am happy to see you on SeekingAlpha. I do remember your appearances on Wall $treet Week and always respected your views. I added you to my "Follow" list, and I look forward to more of your articles. Thank you.

Oct 08 11:08 AM

[TxTim:]

I think you made some good points but left out something very important that needs to be considered.... that shareholders in the last 15 years or so are more and more cheated by management and complacent boards that DO NOT put them first. By definition ownership should reward when the company does well. Of late, management slips money in their own pockets and out the back doors in good times and leaves the buy-and-hold investor holding the bag in bad times. Merrill Lynch bonuses ring any bells? No, I think, buy-and-hold is some sort of faith-in-the-market based complacency that causes us to look away when continual scrutiny is what's required.

Oct 08 11:43 AM

[mbkelly75:]

Good to see you here. I watched Wall Street Week for well over a decade and miss both it and Louis. I have been a buy-and-hold investor for over 5 decades (although I tend more to what Cramer calls buy-and-homework and have done so long before Cramer was around). Re-investing the dividends most of that time has done me very well over that time. I have a separate portfolio for trading stocks - some years I do well and some I do not. I tend to do what some writers have termed "stacking" (taking ALL the money from a successful trade and putting it into the next one - done 5 or 10x - it can really add up to a huge gain over the year) so when I am right I do very well and wrong - not so well. I am right far more often than I am wrong so it works for me.

Oct 08 11:48 AM

[David Van K...:]

It is good to see Mr. Dessauer writing on SA. I hope he continues. Many people, including me, have very high respect for his opinions.

However, I don't agree with this statement: "Stocks are supposed to produce decent capital gains without counting dividends." There are two basic ways to make money in the stock market: through capital gains, and through dividends. Those are the two components of total return. Investing using a long-term dividend strategy can be highly lucrative.

"Buy-and-hold" can be a misleading phrase. Even Mr. Dessauer, in describing his 2009 portfolio, says that after the first three quarters, "I have decided to make no changes. I will go with buy and hold for three more months." Implying, of course, that using whatever his statndards are, he would have considered selling or swapping a stock or two if they didn't meet his standards. And since he does this every year, he might replace all of his stocks with different ones for his 2010 portfolio.

So he is buying and holding for one year, with quarterly checks in between. That's great, but not what many people mean when they say buy-and-hold. They are thinking about much longer time frames.

I think Mr. Dessauer has it down perfectly: Think of buy-and-hold as buy-and-watch, or buy-and-monitor. And don't fret that you will be violating your principles if, after 3 or 6 months, you conclude that you made a mistake and should get out of a bad position and sell it.

Oct 08 02:47 PM

[uncle frank:]

good to see your still kicken John,,,, but, ... in your news letter of years ago i remember your advice to but global Xing.... i dont remember advice to sell. i lost a small fortune John.

Oct 08 05:37 PM

[Old Trader:]

David Van said what I was thinking, as I was reading...esp. the part about periodic rebalancing and/or culling the wheat from the chaff. Its a pretty broad spectrum from "day trading" to "buy and forget", LOL.

He's also correct on the dividend issue. By hanging on, and reinvesting dividends, I've managed to accumulate some very nice, profitable positions. (Normally, my "rebalancing" consists of adding new money to where I think its needed).

Oct 08 07:37 PM

[ATWshop:]

David Van and Old Trader said it best. The author is simply "trading" on a different time frame than most traders. As a comparison, I am a short term trader. No set holding time...I attempt to buy when the price is low and sell again when the price is higher. I am not always successful but my returns this year are "Far" above the authors average return...I run 6 investment accounts and have them classed as Conservative, Moderate and Aggressive... returns this year thru 9/30 have been: +97.5%...+88.1%...+64....
Buy & Hold may not be dead but there should certainly be information published for the average investor to let them know the HUGE difference a simple +3% improvement in their annual returns would make during a lifetime (40 years or so) investing!!!
Also we should see more article regarding the use of Trailing Stops to protect investors from the market moves that we lived thru in 2008.
Just my opinion...Howard

Oct 10 09:24 AM

[ATWshop:]

Sorry... not all of my returns showed up... again, they are:
+97.5%... +88.1%... +64.9%... +42.9%... +29.3%... +25.8%
I trade only Quality companies in my Conservative and Moderate accounts.
I have nothing against John the author...but regardless of a person's background, the return on investments is actually the only yardstick I care to use when looking for solid investment advice.

Oct 10 09:30 AM