Buy & Hold

My clients know that I prefer the Jim Cramer definition of "Buy and Homework" when managing a portfolio. I like this as opposed to simply "buying and holding" which is often for most individual investors more like "buy and hoping". Here is an excerpt with some good rules from Kiplinger.com. {My highlights.}

Buy and Hold Is Risky:

By Whitney Tilson, Contributing Editor, Kiplinger's Personal Finance, John Heins, Contributing Editor, Kiplinger's Personal Finance March 2010

In its August 14, 2000, issue, Fortune went out on a limb with an article titled “10 Stocks to Last the Decade.” The story described a “buy and forget” portfolio meant to capitalize on overarching trends the magazine predicted would dominate the next ten years. It recommended two companies in each of four categories -- media (Viacom, Univision), finance (Charles Schwab, Morgan Stanley), technology (Broadcom, Oracle) and telecommunications (Nokia, Nortel) -- as well as Genentech and, ahem, Enron.

An investor building a portfolio with these stocks would have wanted to forget about it, all right, but not for the reason the magazine intended. From the magazine’s issue date through the end of 2009, precisely one stock, Genentech, rose in value. The next-best performer, Oracle, was down 34%. Enron shares were worthless and Nortel shares very nearly so. Overall, an equally weighted portfolio of the ten stocks would have lost 44%. Standard & Poor’s 500-stock index (without dividends) was a big winner in comparison, down only 24% over the same period.

{The authors} bring this up not to ridicule Fortune, which is consistently one of the smartest and best-written business publications. Rather, we want to point out a few of the many worthy lessons here.

Buy and hold isn’t what it used to be......{B}uying and forgetting in a world roiled by rapid change is an increasingly risky proposition -- especially when it comes to technology.....Now more than ever, you need to maintain constant vigilance in monitoring your portfolio.

Never underestimate the competition.....Although long-term demographic and market trends are powerful, a company still needs to have a strong competitive advantage to succeed.

Valuation matters. Can you guess what the average price-earnings ratio was of the stocks on Fortune’s {above quoted} list? Would you believe 100?....How a stock fares depends not only on the performance of the underlying company but also on how that performance compares with investors’ collective expectations, as expressed by the price they pay to buy the stock. That’s something to keep in mind every time you buy a stock, especially if you’re betting on well-known “sweeping trends.”....

Columnists Whitney Tilson and John Heins co-edit Value Investor Insight and SuperInvestor Insight.

Link: Buy & hold is risky.

*No positions in any of the stocks mentioned in this article but many of these still listed names are components of ETFs which we are long for clients. Long ETFS related to the S&P 500 in personal and client accounts.