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Why the Old “Buy-and-Hold” Strategy Doesn’t Work

|Includes: AABA, Apple Inc. (AAPL), GOOG, GOOG, KODK, NOK

 Back in the year 1998, I remember my parents telling me to buy Nortel Networks Stock, hold it for years, and let it keep doing 2-for-1 stock splits until you’re rich. They said the same thing about Cisco, Intel, and Yahoo. If I listened to them, I’d be in pretty big trouble. So why exactly does the ole buy-and-hold strategy fail these days? Well, I think it’s pretty simple actually. Two things: Technology and Competition.

Today’s stock market is really a global market. There are many foreign companies that get listed on the NASDAQ or NYSE and although they’re overseas, they trade on the US markets. 20 years ago, there were but a handful of foreign companies traded in the US. What that tells us is that today’s market is so much more competitive. Foreign companies are competing against US companies for market share and in many cases, winning. In today’s ever increasing competitive landscape, you can’t simply buy the market leader and expect to make a nice return in 20 years. There’s so much uncertainty over competition that you just can’t be sure that the same market leader today will be the market leader 20 years from now. You could do that a lot easier back in the 80’s and 90’s because there just weren’t that many competitors and the barrier to entry was high. With the dawn of the internet, that barrier has come down significantly.

The rapid advancement of technology has also made it very difficult for any industry leader to stay on top. If you bought Yahoo! stock in 1999, you’d be picking the market leader at the time. But Google came along and now Yahoo is struggling and has seen its share of the search engine market drastically shrink. But does that mean if you bought Google today, they’d still have the roughly 75% of the search market in 20 years? I don’t know. But if history tells us anything, you’d probably lean towards “no”. Why? Because it’s just as likely that some no-name company could probably come along and invent something revolutionary that will blow Google away just as Google did to Yahoo! with it’s “pagerank” algorithm. One simple invention or a new popular product can change the industry landscape almost overnight. Just look at Twitter and Facebook.

Another example is Apple Computers. They came out with the iPhone which revolutionized the marketplace for mobile phones. The market leaders 10 years ago (i.e. Nokia, Motorola, etc) are now struggling just to stay in the game. Technology is just so unpredictable and that in turn, makes investing in tech companies very risky.

Technology has really transformed the way people invest these days. Sure, we had many technology advancements 50 years ago too, but the pace of the advancements were much slower-paced than they are today. Success for a market leader has more to do with how they adapt to the changing technologies rather than the sheer size of their market share. For example, Eastman Kodak, which relied on it’s traditional film business, was a market leader in the camera business. They’ve been public since 1962 and have been synonymous with “pictures” and “cameras” (i.e. Kodak moment) in popular culture. But they had a very tough time adapting their business once digital cameras became popular. Very few people these days use regular film cameras anymore — it’s all digital now. Kodak’s financial viability came into question just 2 years ago because they failed to adapt the new trends. A public company for almost 50 years, their stock price plunged to around $2 per share just last year. Luckily for them, they made the changes to their business in time to survive, but are still struggling today.

So there you have it. Don’t count on the buy-and-hold strategy in the age of global economies, fierce competition, and lightning-fast technological changes. If your’e not careful, you might buy the market leader only to find out they’ve gone belly-up 10 years later!

Disclosure: I am long EK