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TMFBro (< 20)

Buy, Hold, and Make Nothing for 75 Years

Recs

21

May 12, 2009 – Comments (11) | RELATED TICKERS: GM , XRX , KODK

You've probably seen the headlines: GM Shares tumble to lowest level since depression

That's right -- if you bought shares of General Motors in 1933, you have no capital gains to speak of (though you did get dividends, for whatever those are worth -- not so much, if you revinested them). Shares of GM peaked in 1999 at close to $90, got to around $20 in 2005 before rebounding to almost $40 in 2007. Now it's worth about a buck.

But it's not like GM was a fabulous investment before the dot-com bust. Check out this Yahoo chart that goes back as far as the 1960s. The stock was above $50 in 1965, fell to the $30s by 1967, and wasn't above $50 again until 1993. During this period, GM was the global auto sales leader. Let this all sink in: You could buy and hold for decades stock in the worldwide leader of an industry that grew considerably -- one that sells something that most people (at least in the developed world) feel they need -- and still make diddly.

GM isn't alone in being a lousy long-term investment. Check out the charts of these other companies that were once considered blue chips: Xerox, Eastman Kodak, Dow Chemical, AIG. And, of course, we have the banks -- oh, the banks!

Even Coke, while doing nicely from 1982 to 1998, was not so refreshing from 1962 (the earliest point on the chart) until 1982, or since 1998. 

Finally, we must trot out names like Enron, WorldCom, Lehman Brothers, and so on.

Which leads me to my point: I'm fairly confident buying and holding asset classes (e.g., U.S. large-cap stocks, small-cap value stocks, etc.) will work out over the long term. They're down now, but contributions to your 401(k) buy in at lower prices, the economy will eventually recover, yada yada yada. A higher stock market is not guaranteed, as investors in Japan will tell you. But I'm comfortable with the odds. 

But buying individual stocks is trickier -- requiring more diligence, more research, and perhaps a funny mixture of faith/hope/arrogance. Not quite sure. But looking at my portfolio -- whcih includes individual stocks, actively managed funds, and index funds -- the term "buy and hold" really only applies to the latter. 

11 Comments – Post Your Own

#1) On May 12, 2009 at 2:41 PM, russiangambit (29.30) wrote:

Buy and hope. May be it worked for people in earlier generations. But for youger people, in their 30-40s, last 10 years were a complete loss. Then who is to say that next 10-20 years will be better? According to the mutual fund propaganda  stocks on average return 7%. Ok, so last 10 years people were supposed to be 70% up and they are flat. To make up for that, next 10 years should have 14% return. I have hard time believing that it  is possible,

It looks like the US economy will go nowhere in the next 5 years, the hole is too deep.  It seems like Asia and commodities are the best bets for the next 5years, But that is not your average 401K plan.

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#2) On May 12, 2009 at 2:42 PM, cmblitz (< 20) wrote:

While I agree to the point you make about holding asset classes for the long term, I believe you may have blown off the value of GM's dividends too quickly.  A quick check of GM's dividend history reveals it was paying $1.25 per share per quarter through a good chunk of the eighties alone.  In other words, it was paying $5 per share on your $1 investment.  If I sum up the dividends received from 1985 until 2007 for each share of common stock, I come up with $57!

I couldn't find the dividend history pre 1985 and I did not account for stock splits.  So I'm lazy.

Assuming I paid $1 for a share of stock in GM in 1933 and held the dividends from 1985 until 2007, threw out all the other dividends and stock splits, I would have $58 dollars today.  

That an annual return of around 5.6% with a lot of pessimistic assumptions.  In other words, don't forget to factor in dividend growth when evaluating long termreturns.

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#3) On May 12, 2009 at 2:49 PM, wrparks (59.29) wrote:

Within any index or average, individual components may be up or down.  Buying an index and holding it over the last 10 years would have been a poor investment.  But, buying individual components of that index that you believe have potential is completely different.

Of course, that doesn't mean hold them forever either.  It's all about knowing when to get out, and I think that's what most of us are not good at.

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#4) On May 12, 2009 at 3:24 PM, TMFBro (< 20) wrote:

To cmblitz, good point about the dividends. I'll try to do a follow-up post that factors those in.

To comments about how holding an index -- just about any index -- over the last 10 years being a wash, that's true. Perhaps the lesson there is, conventional investing (i.e., buying mutual funds or stocks) just didn't work over the last decade for most people. But stretch it out over 20, 30, or (in the discussion about GM) 75 years, and an index fund has done all right -- certainly better than the "blue chips" mentioned in my post. 

Hey, I'm all for trying to beat the market. The point of my post was really to point out the risks. Report this comment
#5) On May 12, 2009 at 3:31 PM, dudemonkey (40.07) wrote:

Sounds like all the TMF newsletter subscribers are wasting their money then.

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#6) On May 12, 2009 at 3:39 PM, FleaBagger (29.71) wrote:

russiangambit -

7% per year for 10 years is not 70%, but almost exactly 100%. You forgot to compound your return, which is what is being bandied about in these theories/propaganda. 

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#7) On May 12, 2009 at 3:41 PM, TMFBro (< 20) wrote:

Sounds like all the TMF newsletter subscribers are wasting their money then.

Well, as the editor of a TMF newsletter that covers index funds and asset allocation, as well as individual stocks (and taxes, and Social Security, and estate planning, and bonds, and....), I beg to differ.

But I could also argue that another lesson from GM is that, if you're going to invest in individual stocks, it's not a "set and forget" proposition. You need to stay on top of the company, and get second, third, and fourth opinions -- which, of course, you can get at the Fool (from the free articles, here on CAPS, or through a newsletter service).

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#8) On May 12, 2009 at 4:27 PM, portefeuille (99.60) wrote:

GM was the global auto sales leader. Let this all sink in: You could buy and hold for decades stock in the worldwide leader of an industry that grew considerably -- one that sells something that most people (at least in the developed world) feel they need -- and still make diddly.

Skipping the word "sales" does of course make the statement "stronger" but its logic somewhat less "stringent" ...

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#9) On May 12, 2009 at 5:14 PM, dudemonkey (40.07) wrote:

But I could also argue that another lesson from GM is that, if you're going to invest in individual stocks, it's not a "set and forget" proposition. You need to stay on top of the company, and get second, third, and fourth opinions -- which, of course, you can get at the Fool (from the free articles, here on CAPS, or through a newsletter service).

 

You are correct.  I probably should have been more clear that I was being tongue-in-cheek.  I subscribe to 2 TMF newsletters and they've been EXTREMELY valuable to me.  The Stock Advisor newsletter alone has paid for itself a couple times over and I just bought my first stock that was outlined in Global Gains.  Until Warren Buffett says "buy and hold is dead", I'm going to be a long-term buy and hold investor.

And staying on top of your investments is definitely a must. :)

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#10) On May 16, 2009 at 6:56 PM, checklist34 (99.72) wrote:

the real lesson about GM isn't one of "buy and hold" being dead or anything like that, in my view.

The real lesson about GM is the ultimate fate of the stock of a growth company that really, really makes it.  GM really, really made it.  They were what at their peak?  57% of the world auto market or something shocking like that?

Nowhere to go from there but down.  Nowhere for the stock to go from there but sideways.

Eventually, as a company gets large enough, its growth rate slows to something germane, its multiple starts dropping, it falls into the "boring" category.

No matter what anybody thinks, google will be boring someday, just like microsoft is today, no matter how good google performs as a company.  Nobody, but nobody, though microsoft would be boring and germane in 1997 but it was inevitable.  CSCO is boring and germane to an extent now.  DELL is boring and germane and trades at a low multiple. 

Someday GOOG and AMZN will be boring and germane too, and trade at a multiple of 10 or 12.  From a share price of 700 (GOOGs former high) or a mkt cap of about 200B, that implies that to break even in 10 years from there GOOG would have to come to make 15-20B per year, as its multiple WILL CONTRACT as it loses its new kid on the block mystery man sex appeal.  To grow 10%/year from there to a mkt cap of 500B GOOG would have to come to earn 30-50B. 

Basically, it owuld require an epic, sweeping, shocking good case scenario for GOOG to have been a good long term buy from $700.  Something REALLY extraordinary would have had to happen.  Too risky for my blood.

I have a similar opinion of AMZN shares right now. 

I think buy and hold isn't where its at, not because I think the market isn't ever going up again or we're doomed or the sky is going to fall or anything, I just think its inevitable that held long enough any stock will at some point become probably over valued.

And i just think its crazy to hold overvalued stocks. 

GM was a great buy several times in the last 47 years.  It was a great buy in the 1974 bear market/recession, a great buy in the 1982 bear market/recession, a good buy in the 1991 bear market/recession, and so forth. 

Note the pattern there:  buy when the market crashes and everybody is in a panic, make money.  Get out thereafter after the stocks you hold have reached fair value. 

MSFT is one of those epic, wild growth stock stories.  $1000 invested in 198x would be worth $1,000,000 in 1999 kind of things.  And its revenue and profits have grown since its stock peaked, but the stock doesn't grow with it.  Why?  At its peak it was trading for 30 or 50 or something like that x earnings.  A p/e of 50, company already at the top, market cap of 600+B which must have been what?  10%, 8% of the GDP at the time?  That stock simply cannot go up any longer. 

CSCO has lived up to its wild dot com nasdaq bubble expectations, hasn't it?  Its done pretty good.  But again it had a mkt cap of like 600B at its peak...  Lets say that, from there, CSCO proved to be a good buy.  Returning 10%/yr for the next 10 years.  Then it would have to have had a market cap of 1.7 trillion, or what?  17% of the GDP?  20%? 

Not gonna happen.  Thats why small caps outperform, and thats why when the market cap of a stock gets too high its done, it just doesn't realistically have potential to go far higher over the long term.

Stocks that are probably not hitting their previous highs again, or might not hit them again for decades after they were first made, much like GM, no matter how well they do might be GE, MSFT, CSCO (and of course a host of other dot com era companies).  and, it might not be good or amzn, but some other company is going to roll its way onto that list one of these days.  Because the cap got too big, the multiple too expanded, and all of that.

 

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#11) On May 16, 2009 at 7:03 PM, checklist34 (99.72) wrote:

that post was somewhat disorganized, apologies.

Basically:  sometimes stocks just have nowhere left to go.  The mkt cap is just too big, the multiple too high, and no stock has ever, ever, ever kept that uber super exotic mystique forever.  Eventually, they are all old hat.

And i don't think buy and hold forever is a good idea.  No stock should be held once its overvalued, and in general stocks have yielded really stunningly good returns once in a while coming out of big bear market crashes.  Thats when you should buy,, you should sell once the fear subsides and people start believing again. 

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