A famous investor in the twilight of his life was once asked the question, "What is the preferred term to hold an equity?" His answer: "Forever."
You might think the traditional notion of "buy and hold" is dead, especially with so many investors jumping in and out of high-multiple, trendy issues in pursuit of quick profits. Investors who participated in the Lost Decade of the market (2000-2010) saw long-term gains evaporate with the financial meltdown and the housing crisis. So it's understandable that today's investors are seeking immediate gains and taking profits as soon as they hit a certain percentage. With the advent of discount brokerage firms and record low commissions, such a strategy is surely less costly than in the past. So is the old "buy and hold" strategy still valid, or are the "fast-money" investors onto something? In my opinion, yes, and yes.
A reasonably balanced portfolio would include both types of investments. This article will address the "buy and hold," or what some call the core. This is the more stable portion of your portfolio, the one that lets you sleep at night. I'll leave the discussion of "fast-money" tactics to others who are more hip to the intricate details of riskier strategies like options plays.
Building a Core
The core is the center of an investor's portfolio. It is the foundation, which consists of more reliable, safer holdings. To meet that criteria, members of the ore of a portfolio must have three attributes:
1) They must have a reasonable (or better yet low) P/E ratio
2) They must pay a dividend, and
3) They must be diversified.
Five Solid Core Holdings
Perhaps no industry is more safe, reliable and boring than utilities. No wonder they were once the primary investment of trusts for "widows and orphans." Nonetheless, they have a place in the core of every portfolio. American Electric Power AEP is such a safe bet. At a current price of $39.50, AEP has a 9.6 P/E ratio and a nice dividend of 4.7%. Although AEP relies primarily on coal to power its facilities, it has taken the lead in the eventual conversion to natural gas.
Consumer good stocks will always have a presence in our markets because these companies supply us with necessary products to live. Some of those goods may be durable, some non-durable, some necessities and some luxuries. Sure, human behavior can change. Folks go on diets, some cut back on luxuries, others put off major purchases. But a small category of goods are virtually bullet proof -- those that produce addictive products. The poster child for such a stock is Altria MO, the domestic manufacturer of tobacco products that remained after the break-up of Phillip Morris PM. Currently, MO is priced around $32.00 with a multiple of 19 and a dividend of 5%. Although the multiple is a little higher than I would like, MO is a cash cow and well worth the premium.
In the wake of the market meltdown of 2008 and the financial sector's dubious shenanigans before, during and after, it's hard for some investors to consider putting money into this sector. Still, there is one bank that's worthy of consideration: Wells Fargo WFC. WFC has a 150-year history, and was the wise purchaser of Wachovia Bank, the Charlotte based super-regional, for a steal at the height of the banking crisis. With the combination of Wachovia branches in the east and south, WFC has more than 9,000 retail branches and 12,231 ATMs in 39 states and the District of Columbia. It has more than 270,000 employees and over 70 million customers. WFC is the epitome of a core holding with a 10.6 P/E ratio and a 2.8% dividend, which will surely increase in years to come.
There are a number of major integrated "big oil" stocks to chose from, including Exxon Mobil XOM, Chevron CVX, and Conoco Phillips COP, but my choice here is British Petroleum BP. Although there is certainly a perceived risk due to the outstanding litigation, a subject I addressed in Litigation Risk is Not So Risky, BP has core written all over it. Not only does BP have the hefty 5% dividend, but the P/E ratio is also 5. Arguably, such a low multiple is evidence that the market has already priced in considerable exposure. Once a settlement is reached and the uncertainty attached to the stock is eliminated, BP should begin its upward climb back towards $50/share.
Remember the dotcom boom of the 1990s when Microsoft MSFT, Cisco Systems CSCO and Yahoo YHOO were leading the markets and making what seemed like daily new highs? Who would have thought one of them would become a staid core holding? That is what has become of Intel INTC, and that is precisely why it fits into your portfolio. Still the king of chips in a world of competition, INTC makes a product that virtually every person on-line has used or currently uses. It's here to stay. At $26.00 a share, INTC pays a 3.2% dividend and its multiple is sitting at 11. Yes 11 -- I had to check that twice.
Once you've established your portfolio's core, you can consider more speculative, risky approaches like options, short-selling, etc. Believe you me, when you're lying in bed at night sweating the short squeeze on Facebook FB, you'll be glad that you've got a core to fall back on.
A final point -- this sample core portfolio is just a starting point, and many of the names have reasonable substitutes. If you don't like BP, substitute Exxon or Chevron. If you don't like AEP, substitute Duke Power DUK or even another favorite of mine, Verizon VZ. But whatever your choices, be sure to reinvest the dividends. If the stocks are good enough to hold, then they're good enough to buy more of.