Buy And Hold Is Alive And Well

Every time the United States goes through a recession, the pundits all race to be the first to proclaim that “Buy and Hold” is dead.  I can’t watch a financial news channel or read a financial website without some mention of this proclamation.  Well I’m growing tired of it, and if it were up to me, I’d prohibit anyone else from making this point for the rest of 2009.

Buy and Hold is not dead, and I’m on a mission to prove it.  Buy and Hold has worked brilliantly for decades, and it will continue to do so in the future.  The stock you bought in 2007 is worth less now than what you bought it for?  Oh boohoo, go cry me a river…somewhere else.  The economy has peaks and troughs, and we’re in the middle of one of the more serious troughs since the Great Depression.

Buy and Hold has worked wonders for Warren Buffett for years.

The pundits will claim that you can’t buy a stock in year X, leave it alone, and sell it many years later in year Y for a profit.  These people cherry pick companies to make their points.  They find the few companies in the US economy that have failed so miserably that you’d think they were run by the very same people who run the Social Security Administration.  General Motors is a favorite, along with General Electric (which is a misnomer, as we’ll prove below).

To prove that Buy and Hold is not dead, I logged onto Yahoo! Finance and randomly selected 35 components of the S&P 500.  I reviewed these companies’ 20-year returns from May 21, 1989 through May 21, 2009.  I selected the following companies:

Vulcan Materials (VMC: 42.01 0.00 0.00%), Applied Materials (AMAT: 11.30 0.00 0.00%), General Electric (GE: 13.19 0.00 0.00%), Reynolds American (RAI: 40.25 0.00 0.00%), Deere & Co. (DE: 41.85 0.00 0.00%), Freeport McMoran (FCX: 52.20 0.00 0.00%), Zion’s Bancorp (ZION: 13.74 0.00 0.00%), Home Depot (HD: 22.70 0.00 0.00%), Coca-Cola (KO: 46.90 0.00 0.00%), Halliburton (HAL: 22.77 0.00 0.00%), Alcoa (AA: 9.09 0.00 0.00%), Apple (AAPL: 135.07 0.00 0.00%), Microsoft (MSFT: 20.45 0.00 0.00%), Archer Daniels Midland (ADM: 27.19 0.00 0.00%), Pepsi Bottling Group (PBG: 32.09 0.00 0.00%), Johnson & Johnson (JNJ: 54.53 0.00 0.00%), Consolidated Edison (ED: 35.41 0.00 0.00%), Oracle (ORCL: 19.21 0.00 0.00%), Target (TGT: 39.14 0.00 0.00%), AT&T (T: 24.63 0.00 0.00%), IBM (IBM: 104.69 0.00 0.00%), Wal Mart (WMT: 49.55 0.00 0.00%), Pfizer (PFE: 14.69 0.00 0.00%), Boeing (BA: 44.32 0.00 0.00%), Goldman Sachs (GS: 144.65 0.00 0.00%), Union Pacific (UNP: 45.56 0.00 0.00%), Qualcomm (QCOM: 42.95 0.00 0.00%), Conagra Foods (CAG: 18.36 0.00 0.00%), Schwab (SCHW: 17.15 0.00 0.00%), Gannett (GCI: 4.96 0.00 0.00%), Newmont Mining (NEM: 47.35 0.00 0.00%), Loews (L: 26.31 0.00 0.00%), NVR (NVR: 480.50 0.00 0.00%), Bank of America (BAC: 11.30 0.00 0.00%), and United Tech (UTX: 52.38 0.00 0.00%).

Before continuing, go ahead and guess how many of these companies currently trade lower than they did in 1989.  Five?  Ten?  Fifteen?  Nope, wrong!

Of our sample of 35 companies, only one finished lower over this 20-year period, Gannett.  Gannett was off nearly 50% from its 5/21/89 price.  Compare this to several companies like Microsoft and Oracle which were up approximately 5,000% over the same period.  Even General Electric’s stock price increased since 1989 by a whopping 403%.

This sample is less than 10% of the overall population, but I believe that others would find similar results if running the same random sampling techniques.  Very few companies have seen losses over a 20-year period.

After running this analysis, I still wasn’t happy, so I pulled ten of these stocks (including Gannett) into one portfolio (each at 10%) and reviewed how the portfolio would perform over the same period.   I chose Microsoft, United Tech, ConEdison, General Electric, IBM, Conagra, Gannett, Loews, Schwab, and Bank of America.  Creating this portfolio in 1989 and leaving it alone until 2009 would have yielded 403%, compared to the S&P 500 return of 177%.

403% is an outlier, and we’d expect a combination of this and other analyses to bring the average to the historical return of the S&P 500, but this analysis is sufficient to prove our point that buying and holding a diversified portfolio of 10-15 stocks within different industries will provide long-term investors with a comfortable investment.

I’d like to stress that it would take a diversified portfolio to achieve these results.  Buying and holding one or two stocks leaves you open to substantial and reckless risk.

This takes us to our next point. The average American doesn’t need to get bogged down by spending hours upon hours deciding which 10-15 stocks to hold, and whether they’re all in different industries.  Simply investing in a few well diversified mutual funds or exchange traded funds (ETFs), especially those that track a well-known index, will provide the average investor with a solid long-term return.

It’s not very difficult to Buy and Hold and make money, but these pundits write and talk on newspapers and TV shows about the death of Buy and Hold in such a frightening manner that regular investors panic and abandon this strategy.  These investors then either attempt to time the market with little knowledge of how markets work, or simply avoid the market altogether and invest their money in 2.00% CDs for the rest of their lives.  This is a big mistake, since there hasn’t been a single 30-year period where the S&P 500 has lost value.

If you’re reading this and aren’t sure where to put your money, stick it in a few low cost mutual funds or ETFs that track major indices like the S&P 500, Russell 2000, or MSCI Emerging Markets Index and leave it alone.  If you have a little more interest in the market, go ahead and piece together that diversified stock portfolio.  These pundits are wrong.  Buying and holding is alive and well, and as long as the US and world economies continue to grow, you’ll see your portfolio grow along with them.