I love the fact that Warren Buffett's annual shareholder letter begins by measuring the annual increase in Berkshire Hathaway's (BRK.B) book value, rather than noting the annual stock performance of Berkshire stock during Buffett's tenure. This is an important example of the thought process that animates true buy-and-hold investors. Instead of focusing on what other market participants are willing to pay for shares of Berkshire's profit machine (i.e. the stock price), Buffett chooses to focus on how much the company itself has grown over each twelve-month stretch.
These days, how often do we hear market pundits and online articles proclaim the death of buy-and-hold investing? Whether it be globalism, internet technology, rapid computer trading, "extreme" volatility, or some other bogeyman of the month, many people are quick to latch on to the idea that buy-and-hold investing is dead. I disagree with these red-herring claims, largely because many of the arguments against buy-and-hold investing assume two premises that I am not on board with.
The first one is the notion that every large-cap company is a candidate for buy-and-hold investing. This is simply not the case. Cyclical companies are categorized as such for a reason. I would never buy shares of Ford (F) or Alcoa (AA) with the intention of holding the shares for 20 years. The supposition that someone can buy a stock and hold it for 10, 15, 20 years is a fairly picky demand - and as such, there is a limited universe of stocks that are appropriate for indefinite holding periods.
If you limit your stock selections to companies that you believe have a low amount of debt, a durable competitive advantage, and a decades-long record of growing earnings and dividends, then you've likely found fertile ground for buy-and-hold candidates. And if you can load a portfolio with the Cokes, Pepsis , Procter & Gambles, and Johnson & Johnsons of the world, and if you can get in at a reasonable valuation, then the possibility of enjoying a successful buy-and-hold experience becomes alive and real.
The other argument often used in attempts to debunk buy-and-hold investing focuses on share price, rather than growing profits. Some people might try to point out that Coke (KO), Pepsi (PEP), Johnson & Johnson (JNJ), and Procter & Gamble (PG) haven't exactly generated eye-popping total returns over the past decade or so, as if this proves the non-viability of buy-and-hold investing.
Well, Coke traded around 50x earnings in 1999, Pepsi traded around 29x earnings in 1999, Johnson & Johnson traded at 32x earnings then, and Procter & Gamble was trading around 31x earnings. Of course, the subsequent returns were sub-par - the expectations for future growth at those prices were far above the type of growth that mega-cap consumer staple stocks can deliver. If you buy stocks at a poor valuation, it becomes your fault - not the company's - when the stock's future performance delivers returns below your expectations.
Instead, let's look at how each of these companies performed on the business level over that period - Coke grew annual earnings from $1.30 to $3.85 over that stretch, Pepsi grew annual earnings from $1.23 to $4.30, Johnson & Johnson from $1.49 to $5.00, and Procter & Gamble from $1.43 to $3.93. Each of these companies managed to roughly triple earnings over a 13-year period. The danger was not that these companies were unable to grow profits year in and year out, but rather that investors were willing to pay too much for a share of those growing profits at the start of the millennium.
I'm skeptical of market prognosticators who claim that buy-and-hold investing is dead. They often rely on straw-man arguments that highlight the mediocre performance of companies that are not built for holding indefinitely, or they point out that blue-blood stocks like Coke and Pepsi delivered poor returns over periods that include a poor initial purchase price. But when you combine reasonable (or better) valuations with companies that have storied records of annual earnings growth (like the four mentioned in this article), then the theory of buy-and-hold investing becomes much more difficult for the 'bashers' to try and debunk.