I really enjoyed reading Rocco Pendola's recent article on Seeking Alpha titled "MBAs, Gimmicks, and Apple's Culture" . The article discusses why the conventional and standard wisdom does not always produce the optimal, textbook results. In Rocco's case, he talked about how Apple (NASDAQ:AAPL) keeping a cash hoard of $100 billion could be the smart thing to do, even if it's not the textbook thing to do. After all, being a part of company that has as much money in the bank as the GDP of Vietnam gives you a certain swagger that you can't quite define numerically.
Anyway, Rocco's article gave me the inspiration and audaciousness to write this: I think many investors could benefit from putting their investment holdings into stock certificate form. Over the past several decades, the advances in technology have made regular investing accessible and affordable for the so-called average Americans, but in the process, they have also obliterated any walls of resistance between an investor and the sale of a stock. This strikes me as a mixed blessing.
We've come a long way from the days when my great aunt would tell Human Resources to deduct 10% off her paycheck for retirement accounts, receive a quarterly statement in the mail noting progress, and simply go about business in the meantime. While this approach contains a certain kind of head-in-the-sand bliss that I would never recommend for any investor, I do think that the current ease of online trading takes things too far into the opposite direction. There's not even a broker on the other side of the transaction anymore saying, "Are you sure about that?" To me, there is a bit of tension between long-term investing (where you own shares of Coke (NYSE:KO), Pepsi (NYSE:PEP), and Exxon Mobil (NYSE:XOM) for decades on end) and the internet investing platform, that lets you undo a well-planned strategy at the click of a mouse.
When Warren Buffett was asked by business students at the University of Florida in 1995 about coping with the ups and downs of long-term investing, he offered this bit of wisdom for Berkshire Hathaway (NYSE:BRK.B) shareholders:
"All you get with Berkshire, you stick it in your safe deposit box and then every year you go down and fondle it. You take it out and then you put it back. There is enormous psychic reward in that. Don't underestimate it."
The audience laughed when Buffett said this, but as is the case with a lot of Buffett's jokes, there's a large element of truth present that can be easy to overlook. Right now, if you plan on holding shares of Coca-Cola for the next fifteen years, you must always have the self-control to resist selling the shares after reading an article about how Coke's volume is down 2% in the quarter and everything's going down the gutter. All it takes is "one bad day" and you can completely destroy years of diligent investing. But if you have to visit your safety deposit box, take out the 100 shares certificate, sign them over to the transfer agent, and then mail them in-- well, you've at least put in place some kind of safety valve that adds a bit of friction and resistance to the ease with which it's possible to abandon long-term strategies in a short-term, misguided moment of panic.
And when it comes time for the dividend check to get reinvested, the money will accrue in your transfer agent account, making it a bit more obnoxious to sell the shares. The one time this strategy backfires is if your company is collapsing in a hurry and you have to wait 2-3 days to sell it. If you saw Lehman Brothers or Bear Stearns collapsing and you held your shares in certificate form, the inability to sell shares at the click of a mouse could very well have been the difference between selling out at $12 per share and at $2 per share. The greatest risk inherent to the stock certificate strategy is that you are left vulnerable if an event arises in which you need to sell those Pepsi shares on very short notice.
But holding stocks in certificate form does come with a great advantage. Most people who are truly successful with long-term investing---the type of people who can regale you with stories about how they bought IBM (NYSE:IBM) in 1960 and still hold those shares today, at a cost basis of $0.32 per share-- tend to have an ownership mentality. When they see a tech guy from IBM come in to do work at the law firm, they think, "I'm profiting from this."
Physical stock certificates that show a picture of the company, your name, and the number of shares that you own encourage this ownership mentality better than the visual representation of two to three letters on a computer screen attached to several numbers.
For the most part, Henry David Thoreau was on to something when he said that we should structure our lives with, "Simplify, simplify, simplify!" in mind. But convenience at all costs does come with its own set of risks. The fact that you can simply log onto a computer and destroy a well though-out strategy anytime you have a temporary "moment of passion" can be a scary thought. In some ways, the fact that the computer "is always there" for investors to alter their long-term investment plan is kind of like having a floating bowl of chocolates follow you everywhere while you're trying to diet. Some people can handle the temptation, and some people can't. And some people might be best served by removing that temptation altogether.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.