Does Buy-and-Hold Work on Major Blue Chips?

Throughout most of the 1980s and 1990s, a "Buy and Hold" strategy on the major blue chip stocks was a very popular and often profitable strategy.  However when you examine 4 of the biggest, most widely held names, this strategy has not worked well in this decade of the 2000s. Microsoft (MSFT) and Wal-Mart (WMT), two giant household-name type companies, are held in countless investor portfolios and funds.  However, unless your short-term entry timing was right, money invested in these behemoths has been "dead money" for most of this decade.  Take a look at the MSFT long-term chart below

MSFT LONG-TERM CHART

MSFT has basically been land-locked between 25 and 35 since the year 2000.  At an average cost of 30 (middle of this range), an investor would have made basically zero return in the past 8 years.

WMT Long-Term Chart

As the above chart shows, WMT has been largely range-bound between 45 and 60 since 2000.  At the middle of this range around 52.5, an investor would have been underwater from 2005 to 2007, although it has rallied above this recently.

Two other big mega-caps that were believed to be among the "best of breed" for buy and hold are actually on the verge on penetrating to 10-year lows.  If you examine the next chart, General Electric (GE) looks likely to head towards another test of its long-term low around 25.

GE Long-Term Chart

As the following chart shows, Citigroup (C) has felt the effects of the mortgage/credit crisis, and is right around its 10-year low around 20.

C Long-Term Chart

The bottom line is the simplistic strategy of "buy and hold" on blue chips stocks is no longer a guarantee of profits, or even a protection against losses.  Today's "bluest of the blue chips" may be tomorrow's bloated, slow-growth, dead money stocks.  The same is true of broad market indices and mutual funds in most cases.

While there is nothing wrong with buying blue-chip names to hold onto for an extended period of time, in all trades it is advisable to find low-risk entry points, in my view.  This can be through the use of charts to find the bottom area of trading ranges, or on pullbacks towards moving averages, for example - or buying when sentiment is very low and all the news appears negative if your long-term view is still intact.  Also, rather than "buy and forget about," a disciplined managed account that re-balances and re-allocates on a quarterly, semi-annual, or annual basis would seem to me to be a more advisable way to go.

Disclosure: None.

Comments

[Paleo]

Without including dividends the chart means nothing-long term divvies comprise 40% or more of total return.

[ajhough]

I find the article quite interesting but I am stuck with a portfolio of "blue" chips which have a reasonable payout. Most people who talk of "dead" money fail to account for the dividends. In addition, what does one do with mounds of cash? CE's pay nothing, bonds are for traders, stocks and real estate no longer provide a satisfactory return. Own a little of everything?

[mikkelian]

did u take into account stock dividends and cash dividends and rights issues over the years? I did not study it yet, so you might have already, but that is an important consideration.

[Cicero]

Exclusion of dividends from stock charts is my pet peeve. It astounds me that more people don't notice/care. StockCharts.com is one of the few sources I know of that incorporates dividends into their charts. Yahoo can denote the dates and amounts of dividends, but you have to do the math, as opposed to seeing results visually. Mornigstar uses total return in their snapshot version, but I don't think you can compare two stocks or funds on the same graph.

[Muddling Investor]

Buy and Hold works great during long term bull markets. The last one started in 1981 and ended in 2000. If you bought and held during 1966-1980 period, you had about the same return as in 2000-2007. Dividends are OK, but if company pays 1.5% and stock doesn't grow, you're much better with CD (and much safer to boot). That's why index fund investing right now is plain stupid.

[barcswine]

My goodness is it possible that I shot myself in my left foot buying GE, and Exxon Mobil got my right foot, down the years long gone by, and didn't feel any pain ? By my calculations, dividends and splits included, I am way ahead of the game. But this financial pundit says I am wrong. Hmmm!
Sure beats me how unless I suffer from terminal dumbness.

[mkreisel]

Before you whine about blue chip stocks going nowhere, you should first study how blue chips performed during the 1906-1921, the 1929-1949 and the 1966-1982 periods.

And please don't forget dividends, PFE is paying more than 7% these days.

[mariposa]

Totally in the dividend-reinvestment camp, with those blues that have very little chance of precipitous drop, and usually raise div. Especially if you have a 40 year time horizon.

[Moby Waller]

Agreed on some your points. Sorry I left dividends out of the article, I had meant to mention them. However, my data shows MSFT and WMT with about a 1.6% yield currently -- GE and C yields are higher, but that is due to their share prices being around multi-year lows.

[MurphMan]

When one selects the Blue Chips and the time period they want to prove a pre-determined point, it is hardly a surprise that the point is "proven". (BTW, since when is 7+years considered "long-term"?...

An analysis of all the Blue Chips as a group, over at least 15- 20 years, which includes dividends might be more revealing of the truth than a selective analysis that starts at an overheated market peak.

[MurphMan]

One postscript along the selected statistics line...why does one company's chart start in 2000 and another in 1998?

[Moby Waller]

I was going with 2000 for all charts, but changed GE and C to show their significant lows just before 2000.

Also, what got me thinking of this story was that the "Consensus Top Buy Blue Chips" of the early-mid 1990s were stocks like MSFT, WMT, GE, and C. Also names like KO, PG, CSCO, ORCL, etc. It was widely said and thought you could just buy these and put em away and make money -- obviously there have been better places to be in the 2000s than these big names. I was thinking of what are the names today that most everyone loves and think have almost neverending upside: GOOG, AAPL, MCD, XOM, CHL, & Materials/Commodity type Sectors.

[AJ30]

I think the point is well taken, there are NO "ONE DECISION STOCKS", as was so often espoused in the 60s and 70s. Every investment should start with a performance plan. If it doesn't perform "fire it".

[AJ30]

It would also be interesting to add in the dividends etc., and then scale that against the purchasing power of the dollar. Thats the story of how you can go broke making money.

[kurt walter]

buy and hold old blue chips that raise dividends every year.

[eddybaby]

Your chart shows nothing more than the slow re-alighment of price & value. With regard to Microsoft at least, you need to consider how the PE has changed over this period too. Its fallen across this time from a very high multiple (think Google today) to mid teens, which for a stock of this quality is significantly undervalued, and will start to march up in tandem with EPS (as ideally all stocks should, if they perform as a function of the business's underlying value, not of over-optimistic projections of future growth).

[ContrarianGuitarist]

I've held (and still do hold) 3 of the 4 mentioned. True they've been flat. Others (YUM, PEP, MCD, RPM) have made up for the forest-like horizon line of my blue chippers. Though I am up on WMT about 130%.

[rockymtnway]

The dividend discussion is critical here since many of these companies work hard to raise dividends every year. A $1,000 investment in something like GE isn't just going to give you 4% for the next 10 years. That dividend is going to grow, year after year and after 10 years the yield is likely to be the equivelent of 10% based on your original investment. When you compound that with dividend re-investment, you're looking at safe investments that hold the potential of building a rather nice nest egg without a lot of trading fees or volitility. While I understand the appeal of picking nothing but fast moving winners, it's a riskier game with as many winners as losers. I believe a well diversified portfolio should contain both blue chips that are buy and hold investments (with dividend reinvestment, of course) and small caps with explosive growth. However, if you're not the type of have the patience and discipline to watch the small caps, then for gawd's sake, stay away from them.

[chrism1962]

I don't believe that GE will give a 4% dividend over the next 10 years, they have structural problems to overcome. They are not an industrial Company with financial divisions, owing to their debt levels, they are more of a financial behemoth with an industrial arm.



The Infrastructure division is the only one performing well at present. But the high oil price, may be extremely difficult for them in the short term. Airlines are starting to mothball aircraft, and mothballed aircraft do not need spares, also options on new aircraft can disappear overnight. The same may happen on locomotives, if the higher running costs cannot be passed to the end user.

Yes, Solar, wind and (possibly nuclear) will help to offset the higher oil price, but margins will be hit in the near term.

The financial divisions are due to have some pretty hefty write downs, so rumours of a capital raising exercise are not to be discounted.

You can expect GE to divest itself of non-performing assets, for quite a while, to help rebuild its balance sheet. It is interesting to note that GE has almost $200 billion of Debt maturing THIS YEAR, yes they can probably roll it over, but the rates may be higher than they once were.

I hold no stock in GE, and have no interests to disclose. I just feel that GE may have split itself in to logical focused companies, if it wants to maintain high dividends.



Chris Marshall

[User 239889]

This is great news!