I enjoy writing articles for Seeking Alpha that point out the benefits of owning wonderful companies (bought at a rational price) for extended periods of time. I find it exciting to point out that a $10,000 investment in Procter & Gamble (NYSE:PG) made in 1981 would be worth $720,000 today, delivering an annual total return of 14.79% in the process. Or even how a $10,000 investment in Chevron (NYSE:CVX) made in September 2002 would be worth $44,000 today, delivering a total return of 16.20% in the process. With Roth IRAs and other tax-advantaged accounts at our disposal, it can be quite enjoyable to watch how several thousand dollars in seed money can turn into an automatic money machine that creates wealth for shareholders over time.
Frequently enough, critics of a buy-and-hold strategy will pose questions such as: What about when Coca-Cola (NYSE:KO) traded at over 50x earnings in the 1990s? Or what if you owned Johnson & Johnson (NYSE:JNJ) when it was over 50x earnings? What about buy-and-hold then?
I think that such questions underestimate the flexibility that we as investors enjoy. At any point in time, my overriding purpose with investing is to create wealth in the long-run. Holding excellent companies for long periods of time strikes me as one of the clearest paths to accomplish that end. And that is why I think of buy-and-hold investing in this regard: a buy-and-hold investment is not an investment that you necessarily hold for an extended period of time, but rather, are prepared to hold for an extended period of time.
Take a company like Walgreen (NYSE:WAG). After the Express Scripts (NASDAQ:ESRX) deal fell through, Walgreen traded in the $30 range, catching the attention of value investors. If I had bought shares at the time, my investment thesis would be this: "This company seems reasonably likely to grow earnings and dividends by at least 7% over the next decade. And because I'm buying an excellent company at around 10x earnings, it would take a significant amount of things to go wrong in order for me to lose money on this investment." Now let's say there's a huge run-up in the shares in the coming months that takes the price to $70. There is nothing to stop a buy-and-hold investor from effectively declaring, "I had been prepared to own Walgreen for the next ten years, based on my premise that the earnings and dividends would grow by at least 7%. But Mr. Market is currently giving me a gift by running up the share price of Walgreen. I am going to sell the stock, and deploy the money elsewhere into a stock that is undervalued and/or can give me better current dividends."
Investment strategies do not come with straitjackets attached. It is enough to make a determination that you could own an investment for ten years or more, but there is no requirement that you actually effectuate that declaration if Mr. Market is going to give you an opportunity. If you're a hockey player, you don't expect to take shots from mid-ice. But if the other team gives you a present and pulls the goalie late in the game, there is no reason why you can't take advantage of the situation and shoot for the empty netter. If Mr. Market is going to act foolishly, we can always reserve the right to respond intelligently.
That's why I don't regard periods of overvaluation for certain stocks as a tension with a buy-and-hold strategy. When an excellent buy-and-hold investment such as General Electric (NYSE:GE) trades at 50x earnings in the 1990s, you can sell your investment and put the proceeds into something that you believe offers better value. Or, you can continue to hold. Despite the lofty valuations of the 1990s, the failure of GE Capital during the financial crisis, and the cut in GE's dividend, the company has still returned 9.68% annualized to shareholders since 1990 (turning every $1,000 invested in $7,700 over that time frame). When you're dealing with excellent companies, there are multiple paths to success. And when excellent companies become overvalued, there is nothing to stop a buy-and-hold investor from accepting a gift from Mr. Market. What counts is finding the types of companies that you can hold for decades. Once that determination is made, you have the freedom to actually hold the security indefinitely or take advantage of any subsequent overvaluation that Mr. Market throws your way.