Daily Gains Letter

After Yesterday’s Collapse: The One Stock to Buy and Hold

By for Daily Gains Letter |

Buy-and-Hold Strategy Still Effective in Today’s Stock MarketA friend of mine, let’s call him Mr. Speculator, recently asked me if the buy-and-hold investment strategy even makes sense anymore. On one day, the stock markets are up on bad economic news, and then on the next, they are sliding lower on good data. “I don’t think investors should bother with fundamentals anymore; they don’t matter,” said Mr. Speculator. “They should just trade the directions markets are going in and hopefully they will do alright in the end.”

First of all, Mr. Speculator’s argument does have some merit. The stock markets here in the U.S. economy, according to many, have gone up too much, on very little economic growth. Since the sell-off from 2008 to 2009, key stock indices like the S&P 500 have roughly gained more than 120%.

Looking at the performance of the economy, it’s mediocre, to say the least. The jobs market remains under pressure; the Bureau of Labor Statistics reported that the unemployment rate in the U.S. economy stood at 7.6% in May. That’s certainly lower than its peak in 2009, but nowhere close to the pre-financial-crisis level, when it was around 4.7% in 2007. (Source: “(Seas) Unemployment Rate,” Bureau of Labor Statistics web site, last accessed June 19, 2013.)

Other economic indicators are showing very similar performances, if not worse. For example, the housing market is still depressed, companies are piling up inventories, the number of individuals in the U.S. economy on food stamps has been continuously increasing, the government keeps on spending more than it earns, and cities across the country are struggling with budget deficits.

That said, Mr. Speculator is sadly forgetting the most important part of the strategy—that it works over a long period. The results of a buy-and-hold strategy are not visible right away. Speculating and “trading where the stock market is going” does provide investors with quick returns, but they end up taking higher risks. It involves timing and very close monitoring. If investors are not familiar with the proper ways of speculating and minimizing their risks, they can destroy their portfolio very quickly.

A buy-and-hold investment strategy is still a viable option, and investors with time on their hands and a dislike of risk can reap rewards.

Consider Johnson & Johnson (NYSE/JNJ), for example; take a look at the company’s chart below:

Johnson & Johnson Chart

Chart courtesy of www.StockCharts.com

If investors bought this company’s shares in 2004 at around $40.00, with the current trading price of $86.11 and dividend accumulation of about $17.20 per share since, investors’ returns would have been above 150%. (Source: “Johnson & Johnson – Historical Prices,” Yahoo! Finance, last accessed June 20, 2013.)

Saying that the buy-and-hold strategy doesn’t work may be just faulty thinking.

To implement this strategy in their portfolios, investors need to look at companies that are fundamentally strong—meaning they have a good earnings track record, revenue growth, and have paid continuous dividends.

When investors are taking the route to buy and hold, they need to keep in mind that sometimes, companies run into trouble and go out of business—just recall the Lehman Brothers, for example. Investors need to be aware of what they own in their portfolios, and if they believe the firm is facing threats, then they should consider exiting the position.

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