Back in July, I wrote an article titled "My Investment Advice: Do Nothing!" In that article, I stated that through many years of investing I had learned that holding a stock you have purchased, as long as the business is performing well, was the best strategy for long-term gains. I then cited a number of examples from my investing history where if I had held the stock I owned, I would have had exceptional gains, but for one reason or another, I sold the stock and missed out on much of the gain.
That article came to my mind, when this past Wednesday I was off work and happened to catch Warren Buffett on CNBC. Buffett was spending a couple hours fielding questions during the morning Squawk Box show. Near the end of the show, Becky Quick asked Warren to play a word association game with her and began the game by saying "buy." Warren responded by saying "hold." He went on to explain his answer as follows.
I say, basically, 'hold.' The idea that the European news or slowdown in this or that or anything like that, that would not cause you to, if you owned a good farm and had it run by a good tenant, you wouldn't sell it because somebody says, 'Here's a news item,' you know, 'This is happening in Greece' or something of the sort.
If you owned an apartment house and you got to raise the rents a little and it was well located and you had a good manager, you wouldn't dream of selling it.
If you had a good business personally, a local McDonald's franchise, you wouldn't think of buying or selling it every day.
If you own stocks, you own pieces of businesses, and they're wonderful businesses. You can pick the best businesses in the world."
And to buy or sell on current news is just crazy. You're in a wonderful business. You've got people running it for you. You know you're going to do well over five to ten years. And to think news events should cause you to dance in or out of something that's a wonderful game is a terrible mistake.
So, get into a bunch of wonderful businesses and stay with them...
By no means am I comparing myself to Warren Buffett; he is 10-times the investor I am. However, I will say that what he states in the above quote is what I have learned over 40 years of investing. When you invest in a stock, you are investing in a business, before I invest a dime, I review the business of the company I am thinking of investing in. I look to see if the company's business is currently performing well and determine the likelihood the company will continue to perform well. Only after I have assured myself that the business is performing well and will continue to perform well, do I look at other things like price, P/E, etc.
Buffett also stated during the interview that before he puts money into a new stock, he compares it against the best ideas he already owns. "I usually end up buying more of something I already know. Any new company, any new stock I look at, I measure it against the best idea I've got among the present ones. And I'm perfectly willing to just keep adding to the present ones. So it has to beat them."
Trading in and out of stocks because I thought I had a better idea today, than I had yesterday, is what I use to do. Although I have learned to control the urge, I still, on occasion, have to talk myself out of selling something to buy something else. Last week I was considering selling some of my Coke (KO) to buy some other stock. I actually pulled out the calculator to figure out how many shares I would have to sell to buy the company I was looking at. Fortunately, I realized what I was doing and asked myself, "What the heck am I doing." Coke is a wonderful business, performing very well, with years and years of growth ahead of it. Why would I sell any KO to take a chance on something else? Is the business I am buying better than the business I am selling? If not, I should do nothing.
I own five stocks I consider the pillars of my portfolio. These are stocks I plan to never sell unless their current business model goes off the rails. In just a few sentences I can tell you why I own each and where I see each business in 10 years.
Coca-Cola - World's largest beverage company, still growing sales with plans to double servings by 2020. Pays a nice growing dividend and has a moat like no other company. In 10 years' time, KO will be selling more drinks to more people throughout the world and will have increased its dividend by about 70%. (7% average increase x 10 years)
McDonald's (MCD) - World's leading food service retailer with more than 33,500 restaurants, just starting to grow in China and other countries. MCD pays a healthy 3+% dividend that it has been increasing at a rapid rate. In 10 years' time, MCD will have more restaurants in more parts of the world and will have increased its dividend by about 90%. (9% average increase x 10 years)
Walgreen (WAG) - Leading drug store chain in the United States with more than 8,000 stores, currently in the process of purchasing Alliance Boot, the leading European health and beauty store with over 3,000 stores. When completed, WAG will be, by far, the world's largest pharmacy led health and wellbeing store. WAG pays a healthy 3+% dividend, which it has been increasing for over 36 years. In 10 years' time, WAG will be the world's largest pharmacy/health and wellness store selling more products to an aging population and will be paying a dividend that is 90% higher than it is now. (9% annual increase x 10 years).
Exxon Mobil (XOM) - World's largest publicly traded energy company with more proven reserves than any other publicly traded energy company. World will need energy for as far as my eyes can see and XOM will be providing the energy. XOM is a dividend champion having raised its dividend 30 straight years. In 10 years' time, XOM will be providing energy to a world that will be demanding more energy than it is now. XOM will have bought back millions of shares and will be paying a dividend that is 80% higher than it is now. (8% annual increase x 10 years)
Kinder Morgan (KMI) - The largest mid-steam and third largest energy company in North America. KMI owns approximately 72,000 miles of pipelines and 180 product terminals. I believe natural gas will play a dominant role in America's energy future and KMI, with the largest natural gas pipeline network, will benefit. In addition, management has stated it intends to increase the current 4% dividend by double digits for the next several years. In 10 years' time, KMI will be transporting more product through its pipelines and will be the leading natural gas pipeline company in the United States. In addition, 10 years from now, KMI will be paying a dividend that is double what it is now. (10% average increase x 10 years)
Note - To determine the average dividend increase, I looked at the past few years' increase and then used what I believe to be a conservative forecast for future dividend increases. For the record, in 2012 the respective dividend increases were KO 7%, MCD 10%, WAG 22%, XOM 21% and KMI 17%.
The above companies all have successful leading businesses and all pay nice dividends that they raise every year. I believe 10 years from now, all these companies will still be the leaders in their field. Why would I sell?
As everyone knows, sequestration (the fiscal cliff) is on the horizon. If Congress and the President do not take some action to avert it, automatic steep cuts in government spending will take place starting January 2, 2013. The financial press is full of stories on how this will affect the economy and stocks. Most predict an economic slowdown and a large stock pull-back if an agreement is not reached. What do I plan to do with my portfolio to prepare for this possibility? Nothing at all, unless the prices drop to where I might decide to add shares. If the fiscal cliff is reached, the economy may slow down and stocks probably will drop, but it will only be temporary. I do not believe any of the above company's businesses will be affected over the long term by this event, so why should I sell. The chances of me exiting a stock and buying it back at the exact most opportune time are close to zero. Better I hold the stock and, if the price falls significantly, buy more.
I was invested in stocks on Black Monday 1987, when stocks dropped 22% in a day. I was invested during the lead up to the first Iraq War when stocks dropped almost every day. I was invested in stocks after 9/11 when the country seemingly came to a stop, and I was invested in stocks during the financial crisis of 2008/2009. All these events have one thing in common; the stock market came back from the sell-off. I did not sell during any of these events and actually bought during the 2008/2009 financial crisis. Do not let frightening financial headlines or some talking head proclaiming the end of the financial world scare you out of stocks when the going gets tough. If the company you own is financially strong and runs a great business, stick with it or maybe even buy more. Strong businesses survive and sometimes even thrive during bad times by taking business away from competitors that are not as strong.
I admit I am a conservative investor; I spend more time worrying about the downside than I do about the upside. When I select a stock for purchase, it will have a strong balance sheet, a dominant business with some moat to limit competition, a growing dividend and a sustainable product. Once I find a company with those requirements, I wait for an opportune time to buy it and then hold it for as long as the business performs well. There are a number of ways to make money in the market, but for me, buying companies with the above characteristics and holding them has worked best.
Warren Buffett has mentioned numerous times that the reason he continues to hold Coca-Cola is that, in his eyes, there is not a better business in the world. He does not look at the stock and say, "I have a big gain, I should sell some." He looks at the business and says, "the business is performing well, it is still growing and still raising the divided, I will continue to hold the stock." Look at the companies you hold stock in and review the business performance, if it is performing well, hold it. Resist the urge to sell good companies that are performing well. You are part owner of the business, if the business continues to perform well, the stock price will follow.
I know it may be boring, but in my opinion, buying and holding quality dividend-paying companies is the path to successful investing. Warren Buffett is not one of the most exciting people in the world, just one of the richest.