In my previous article about buy and hold investing, I promised to give my opinion on when “buy and hold” approach works and when it does not work. Should one practice “buy and hold” at all?
Mathematically, I think it works as long as you are not leveraged. Being leveraged on your stock purchase means buying stocks on margin. That means borrowing money from your broker to buy more stocks than your money can afford.
The most you could lose in owning a stock is what you bought the stock for. Meanwhile the most you can gain is practically unlimited. It could be 10, 20 or 100 times what you bought it for! The risk-reward payoff is significantly in your favor then when you “buy and hold”.
However, I do not think one should “buy and hold”. I believe every stock ownership has an “expiration date”. Changes do occur in the company and the economy that changes your opinion on a company. Furthermore, you might want to take advantage of a better opportunity than your current stock holding might offer. One should never own a stock and stop from diligently monitoring the outlook of the company and other alternative investments.
Not all stocks obviously have the same holding period. Some have longer periods than others. Technical stocks such as Intel, Microsoft, Google, Apple, etc, usually have shorter holding periods as they have to continually innovate to continue to grow. In fact that is one of the reasons why Warren Buffett refuses to invest in technical stocks. Think Microsoft. It had the dominant position and was the most valuable company during the PC hay day. But no longer, they were completely blindsided by the growth of the internet and how it would make the PC less relevant. Even Apple, although dominant and most valuable now might not be able to maintain that position if it is not able to come up with what they call “the next big thing”. Other smaller companies as we speak are working to develop that.
If you would like to buy and hold or would like to hold a stock for a long time you might consider basic consumer products companies-those that manufacture goods that will be used repeatedly and by most people as the population grows. The idea is behind why Warren Buffett bought Gillette and probably why you should consider buying Procter and Gamble or Unilever. After all, it is not likely that 20 years from now that parents will continue to be buying iPads for their kids. However, they definitely will buying diapers for their babies.