Why Picking A Stock To Hold Forever Is Total Folly: The Apple/Cisco Case

Sep.26.11 | About: Apple Inc. (AAPL)

The other day I saw an article whose title was something about picking five stocks to hold forever for retirement. I'm sure the companies are all fine businesses but there is more than a little folly to projecting forever.

One of the stocks in the list was Apple (NASDAQ:AAPL). Obviously it has been a huge winner for holders of the stock and holders of certain ETFs where the name has a huge position.

I have nothing negative to say about the name. However that is not much different than the description someone might have applied to Cisco (NASDAQ:CSCO) ten years ago. In the last ten years however, the stock has been a bit of a dog. It is up 34% versus an 82% gain for the Nasdaq. The previous ten years CSCO was up 3800% versus a gain of 190% for the Nasdaq (190% for a decade is outstanding, by the way). It would be easy to point to CSCO's inclusion into the Dow 30 as being part of the story but either way, if you were around during the 90s you remember what Cisco was.

Something will change the trajectory for AAPL, I don't know what or when, it's just a matter of pointing out that anyone buying anything might be able to hold forever but if the story does change in a meaningful way you need to be on top of it.

AAPL could easily turn into a dog stock the same way Cisco did. How do I know? because it happened before. In the ten years ending Jan 15, 1999 AAPL was down 3% versus a gain of 510% for the Nasdaq--this came after dramatically outperforming the Nasdaq in the 1980s.

I had a more interesting thought though than the folly of picking a stock forever. If we had to pick something to hold forever (of course we don't) then wouldn't it make more sense to think about countries in this context?

This is of course a top down concept. A country index will sort out the companies that fail for you as opposed to one of the stocks you own failing and if the prospects of a country for whatever reasons you care about look promising (after thorough research) then picking five countries (or some other number) would make more sense than picking five stocks.

To clarify a couple of things, I am not a fan of the premise put forth in the referenced, but unlinked, article but someone who is looking for some holy grail of having a few holdings and never doing anything with it again might want to consider countries instead of stocks.

I am all for holding something forever when possible, we have several names in the portfolio that have been there since 2004 (when I started at the company) but as disclosed before, we have not hesitated to sell stocks we thought we could hold forever when something serious changed.

A quick word on Operation Twist: More desperate and extreme measures belying just how much trouble the US is in.