Showing posts with label buy and hold. Show all posts
Showing posts with label buy and hold. Show all posts
Thursday 16 August 2012
Getting Rich with Dividends: 3 Tips to Improve Returns With Dividend Stocks
Thursday 9 August 2012
Buy and Hold: Still Alive and Well
By Morgan Housel
August 7, 2012
Meet Bill. He invested $10,000 in an S&P 500 (INDEX: ^GSPC ) index fund 10 years ago and checked his account balance for the first time yesterday morning. He's elated to see his investment is now worth $19,590 after all dividends were reinvested.
Bill knows a thing or two about market history. He knows that, historically, he earned a good return -- 7% a year, or close to average. He remembers that during that decade we endured two wars, a housing bubble, a collapse of the financial system, the worst recession since the Great Depression, 10% unemployment, a near shutdown of the government, a downgrade of U.S. debt, and Justin Bieber. Through it all, he managed to nearly double his money without lifting a finger.
"Buy and hold works wonders," he thinks to himself.
But then he starts reading market news. Almost without exception, he finds that commentators have declared buy and hold dead, using the last decade as proof.
Buy and Hold Is Dead (Again) is the title of one popular book. "Holding an index or mutual fund for decades will not work for today's investor as spikes in volatility and risk can quickly wipe out any gains," one article warns.
"The only way to make money in the equity market is to be nimble, and that means adopting a strategy that is not buy and hold," he reads. "Buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm," another analyst laments.
"What are these people talking about?" Bill wonders. He spent the decade visiting his kids, taking trips to the beach, reading good books, and enjoying life -- and managed to double his money all the while. These professionals, it seems, spent the decade poring over financial news, trading obsessively, stressing themselves relentlessly, and they're bitter about the market.
Bill knows why they're bitter. They didn't double their money. They likely lost money. Most traders do -- a fact he's well aware of. The only people who think buy and hold is dead, he realizes, are those frustrated with their inability to follow it.
Bill is fictitious, but the numbers and analyst quotes here are real.
Going back to the late 19th century, the average subsequent 10-year market return from any given month is about 9% a year (including dividends). If you rank the periods, the time from August 2002 to August 2012 sits near the middle of the pack. What we've experienced over the last decade has been pretty normal, in other words. This goes against the thousands of colorful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.
And even it understates reality. The S&P 500 is weighted toward the market cap of its components, a quirk that skewed it toward some of the most overvalued companies in the last decade. An equal-weight index -- one that holds every company in equal amounts and provides a better view of how companies actually performed -- returned more than 140% during the decade.
Why have so many declared buy and hold dead? I think it's all about two points.
First, if Bill started investing just two years earlier, his returns through today would be dismal. 2000 was the peak of the dot-com bubble; 2002 was the depth of its aftershock recession. Bill started investing when stocks were cheap, setting him up for good returns today. The majority of today's investors, who likely began investing during the insane late '90s, have fared far worse.
But that doesn't prove buy and hold is dead. It just proves that the deluded interpretation of it -- that you can buy stocks any time at any price and still do well -- is wrong. But it was always wrong. It just became easy to forget during the '90s bubble. For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run. If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke.
Second, most people know that buy and hold means holding for a long time, like 10 or even 20 years ("Our favorite holding period is forever," says Warren Buffett.) But, in an odd mental twist, they use volatility measured in months or even weeks to reason that it doesn't work.
The market suffered all kinds of schizophrenic turns over the last decade. Since 2002, there have been 401 days of the Dow Jones (INDEX: ^DJI ) rising or falling more than 1.5%, and 83 days of it going up or down more than 3%. These can be emotionally devastating for investors following daily market news, watching their wealth surge and crash before their eyes.
But Bill didn't even know about them. He was too busy enjoying his sanity at the beach. He knew he was investing for the long haul, and that he bought at a decent price. Why should he care what stocks do on a daily, monthly, or even yearly basis? While others tumbled through manias and panics, Bill's blissful ignorance was one of his greatest advantages -- as it is for most buy-and-hold investors.
Naysayers of buy-and-hold investing lose track of this to an almost comical degree. The "flash crash" of 2010 sent stocks plunging for 18 minutes before rebounding. Last week'ssnafu by market-maker Knight Capital caused a handful of companies to log some funny quotes for half an hour. These events should be utterly meaningless to long-term investors. Yet the number citing them as proof that buy and hold no longer works is astounding.
Jason Zweig of The Wall Street Journal quoted an investor last week dismayed with the Knight Capital fiasco. "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," he said. The same fear was echoed two years earlier during the Flash Crash.
Folks, accept some frank advice: If you measure your portfolio in five-minute intervals, you shouldn't be investing. If you think business value is "lost" by a few misquoted trades, you shouldn't be investing. Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year. An errant stock trade doesn't make a company less valuable any more than misplacing your birth certificate for 18 minutes makes you less alive.
"There's no such thing as a widows-and-orphans stock anymore," Zweig's investor complains.
Sure there is. Ask Bill.
Also read:
*****Long term investing based on Buy and Hold works for Selected Stocks
Buy and hold until fundamentals change is safe for selected stocks.
The Death Of Buy & Hold Strategy
Tuesday 26 June 2012
The pros and high frequency traders rule the world. Is the Buy & Hold Stock Strategy Officially Dead?
If you hold onto an investment for longer than five days, consider yourself the new millennium’s version of Benjamin Graham.
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Source: Reed Business Information, Inc.
Benjamin Graham, the economist often considered the father of value investing.
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“Given recent average volume, the SPY trades its entire capitalization and then some each and every week,” wrote the always-provocative analyst. “Does anyone really wish to argue where valuation might enter the picture in this scenario? Value does not matter in the slightest.”
Analysts blame the hot potato market on the disappearance of the individual investor and the entry of the high-frequency trader. After three bear markets in the last decade, individual investors – especially baby boomers careening toward retirement – don’t have the risk tolerance to be burned once again.
“True liquidity has not come back and the pros and high frequency traders rule the world,” said Brian Stutland of Stutland Volatility Group. “Plus, if the average person ever comes back, then they won't have time to play all day long back and forth in the market. So, maybe buy and hold really is dead.”
Newman notes in his newsletter that the average holding period for all stocks was almost four years from 1926 through 1999. After a tech mania, a housing bubble, and the explosion in electronic trading, the average holding period sits at just 3.2 months today.
The decline in mutual funds and rise of short-term oriented hedge funds are also partly to blame for this trend, investors said.
“From the hedge fund perspective, we are judged on monthly performance, and three months is a lifetime,” said Brian Kelly of hedge fund Shelter Harbor Capital. “Ask any hedge fund or mutual fund manager for how long do they believe they can underperform the market and I guarantee they will tell you, ‘One quarter.’”
In one of the most extreme examples of our day-trading, computer-driven investment culture, Newman unveils this gem: “In the three months from the beginning of March to the end of May, transactions in Apple comprised one of every $16 traded in the U.S. market, very likely the most concentrated focus on one stock in stock market history.”
How many of the human beings or machines behind those trades looked at Apple’s price-earnings ratio?
“I speak with retail investors every day and I can tell you that more than ever, they believe that the stock market is a casino for the large and well-connected investors,” said Mitch Goldberg, ClientFirst Strategy in Woodbury, NY. “Of course, different investment styles go in and out of favor every so often, so to be a long term investor, you’d need a ton of patience and very thick skin. Eventually, the Graham and Buffett way will be back in favor and I think that is what will encourage the retail investor to step back into the market.”
Saturday 23 June 2012
Buy and Hold — Is It For You?
Let's take a look at what exactly "buy and hold" means. We'll also look at how long is long and when you should sell a stock.
What Does "Buy and Hold" Mean
http://www.independent-stock-investing.com/Buy-And-Hold.htmlWhat Does "Buy and Hold" Mean
It's an investment strategy that blends seamlessly with Fundamental Analysis. After you buy a stock, you hold on to it for a while even if its price bounces wildly. You sell only when you have good reason to.
You can see see how this is radically different from a market timing strategy — buy low, sell high.
This brings us to a very important question — how long is long?
Long is relative. From a buy and hold perspective, long would mean at least several weeks. Anything shorter than that would generally fall under another stock investing strategy called day trading.
If you've bought the stock based on the fundamentals, then you should sell only if you have very good reason to. And that brings us to the next important point....
Your decision to sell a stock should be based on the strategy you're using. Since we use Fundamental Analysis, here are our reasons to sell stock:
- When the price of a stock crosses its intrinsic value — the stock is now getting overvalued and with that comes the risk of a sudden drop in price. Time to lock in your profit and exit.
- You realize you made a mistake in your analysis — it happens every once in a while. You find something you don't like about the company or its management. Had you known that before you invested, you would have never bought the stock. If the reasons you bought the stock are no longer valid, it's best to sell. Remove the emotion out of the decision, admit you made a mistake, and sell. You will be better off.
- The fundamentals have deteriorated — the strong past financial performance of the company have now started going south. Evaluate the situation. If it doesn't look like the company will come out of the decline anytime soon, it may be time to sell.
- A better opportunity comes along — you find another company to invest in with great financials and a very attractive price. One small problem .... you don't have enough cash to buy a meaningful amount of stock. Can you sell one or more of the stocks you own that will free up some cash?
The buy and hold strategy does not mean owning a stock indefinitely. Believe it or not, selling a stock is much harder than buying a stock. You tend to get emotionally attached to the stock. It's hard to sell when the price has fallen steeply — you're always hoping that somehow the price will come back up again and you won't loose your money. It's hard to sell when the price rises — you don't want to get in the way of a good thing.
So again, let your stock investing strategy dictate when you should sell. Try and not let emotion get in the way. Remember ... you want to own the stock as long as you don't have a good enough reason to sell it. But if you do have a reason, sell it. Get it over with. Move on.
Saturday 12 May 2012
Interesting interview by John Bogle.
Monday 16 April 2012
To make sure every $1 investment will generate $2000 in just 30 years ...
Fundamental analysts can have good dreams because they usually sleep well. If you are one of them, you don’t have to be afraid of daily stock price fluctuations. Why care so much for $1 to $2 per day price movements and uncertainties when you can get $100,000 30 years later almost certainly and do nothing? The ‘do nothing’ is what makes you an investor. Don’t you think so? Once you bought the shares, you will only sell them if there are fundamental changes; such as change in management or business model. Otherwise, continue riding on their profits and keep on collecting dividends or bonus issues by ‘doing nothing’.
Doesn’t it sound so peaceful?
"To make sure every $1 investment will generate $2000 in just 30 years, make sure you buy the stock at the lowest price possible."
Thursday 8 March 2012
Saturday 18 February 2012
Stay in Touch wi th the Market
Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today.
- This is because the financial markets are prolific creators of investment opportunities.
- Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets.
- Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace.
- Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings?
Being in touch with the market does pose dangers, however.
- Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading.
- There is a tendency to be swayed by recent market action, going with the herd rather than against it.
Another hazard of proximity to the market is exposure to stockbrokers.
- Brokers can be a source of market information, trading ideas, and even useful investment research.
- Many, however, are in business primarily for the next trade.
Saturday 4 February 2012
A growth maverick shares his ideas.
A growth maverick shares his ideas.
Kinnel: You've said you look for "compounding machines." Would you explain what that means?
The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find. http://news.morningstar.com/articlenet/article.aspx?id=534635
Friday 16 December 2011
Stock Selling Strategies: The Buy and Hold Strategy
Stock Selling Strategies
The Buy and Hold Strategy
http://breakoutreport.com/investingcanada/library/weekly/2000a/aa062900.htm
The Buy and Hold Strategy
The selling strategy of what is commonly called the buy and hold approach to investing can be expressed in one word - don't! And the arguments in its favour are strong ones. For one, it has a solid record of success. Such famous names as Warren Buffett and John Templeton made their fortunes with it.
Or consider the remarkable case of Anne Scheiber. She represents, not only the superb returns that can be enjoyed from a skillful buy and hold strategy, but also the pluck to jump back in the game after losing everything.
In 1933 and 1934, at the height of the depression, 38 year old Anne invested most of her life savings in the stock market. She let her broker brother make the picks and they were good ones. Unfortunately, his company went bankrupt and she lost everything. But Anne did not give up.
On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to save another $5000 over the next ten years. In 1944 she invested in the stock market again. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million! That represents an annual compounded rate of return of 17.5%, ranking her among the top investors of all time.
Her secret? Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in Loew's, Columbia, Paramount and Capital Cities Broadcasting. She drank Coke and Pepsi and bought shares in both. She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on. And she hung on to them through thick and thin for over forty years. Through the bear market of 1973-1974. Through the crash of 1987.
Miss Scheiber left virtually the entire fortune to New York's Yeshiva University. By the time the estate was settled in December of 1995, it had grown to $22 million. You'll find links to her story and to investing tips based on her approach after this article.
The Buy and Hold approach to investing focuses on the buying, not the selling. The aim is to buy stock in companies that are solid and growing with long term potential. It focuses on the underlying value of the stock.
The approach is often considered synonymous with value investing. It ignores the stock market, the general economic climate, and prevailing sentiment.
Warren Buffett, considered by many to be the greatest investor of all time, has said that he pays no attention to the stock market, and in fact, would not mind if the market shut down for a few years. He buys stock in a company as if he was buying the entire company. It's the value of the company that interests him, not the value assigned to it by the market. He wants companies that generate consistently growing profits.
Value investors tend to focus on buying undervalued stocks. And value investing is not completely averse to selling a stock, though the preference is to hold. As the Templeton Fund puts at their website, "Templeton buys stocks with the intent to hold them until they reach their "fair" value-- typically five years."
Buy and hold investors do sell when the fundamentals of a company change or when a stock becomes so grossly over-valued by the market that it would be foolish not to take profits. But in general, short term market fluctuations are ignored.
Downside to Buy and Hold
Of course, while buy and hold investing has definite advantages, there is a downside.
There have been major bear markets in the past and such markets tend to drag down all stocks, even those of good companies. If such risks can be minimized, wouldn't it be worth it?
The question is, can it? In the June 19, 2000 issue of the Hulbert Financial Digest, Mark Hulbert points out that there are newsletters who have been able to minimize investor losses during severe market corrections. Five in particular stand out. These five market timers were able to keep their readers' losses to one or two percent during each of the last five major market corrections since August 1987 (while the Wilshire 5000 averaged a 15% loss and the NASDAQ Composite lost 20%).
But...and here's the rub - those five newsletters failed to capture the tremendous gains made during the up cycles. Their average returns for the entire period from August 31, 1987 to May 31, 2000 ranged from 2.3% to 7.2% while the Wilshire averaged 14.3% and the NASDAQ 17.1%. Safety comes at a serious price!
In fact, Buy and Holders disparage the notion of market timing. It is folly, they say. And a pamphlet from the Templeton Fund in 1997 demonstrates that better than anything. Follow the link below for a summary.
Summary of Advantages and Disadvantages
of the Buy and Hold Strategy
of the Buy and Hold Strategy
| Advantages | Disadvantages |
| Don't have to worry about the market. | Doesn't protect against bear markets and corrections. |
| Don't have to worry about the economy. | Stocks should be extensively researched and carefully chosen. |
| Don't have to pay attention to short term fluctuations. | Long term strategy. |
| Easy to manage portfolio. | No quick short term profits. |
| Ideally, don't have to sell at all. | |
| Notable success stories and history. |
http://breakoutreport.com/investingcanada/library/weekly/2000a/aa062900.htm
Thursday 15 December 2011
Simple Stocks Purchase Principles
Get-rich-quick schemes just don't work. If they did, then everyone on the face of the earth would be millionaire.
This holds true for stock market dealings as it does for any other form of business activity.
Don't misunderstand me. It is possible to make money and a great deal of money in the stock market. But it can't be done overnight or by haphazard buying and selling.
The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers the losses when the market takes a sudden downturn.
The seasoned investor buys his stocks when they are priced low, holds them for the long pull rise and takes in between dips and slumps in his stride.
"Buy when stock prices are low, the lower the better and hold onto your securities," a highly successful financier advised me years ago, when I first started buying stocks.
"Bank on the trends and don't worry about the tremors. Keep your mind on the long term cycles and ignore the sporadic ups and down..."
Great numbers of people who purchase stocks seem unable to grasp these simple principles.
They do not buy when prices are low. They are fearful of bargains. They wait until a stock goes by and up and then buy because they feel they are thus getting in on a sure thing. Very often, they buy too late just before a stock has reached on of its peaks. Then they get caught and suffer losses when the price breaks even a few points.
http://www.sap-basis-abap.com/shares/simple-stocks-purchase-principles.htm
This holds true for stock market dealings as it does for any other form of business activity.
Don't misunderstand me. It is possible to make money and a great deal of money in the stock market. But it can't be done overnight or by haphazard buying and selling.
The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers the losses when the market takes a sudden downturn.
The seasoned investor buys his stocks when they are priced low, holds them for the long pull rise and takes in between dips and slumps in his stride.
"Buy when stock prices are low, the lower the better and hold onto your securities," a highly successful financier advised me years ago, when I first started buying stocks.
"Bank on the trends and don't worry about the tremors. Keep your mind on the long term cycles and ignore the sporadic ups and down..."
Great numbers of people who purchase stocks seem unable to grasp these simple principles.
They do not buy when prices are low. They are fearful of bargains. They wait until a stock goes by and up and then buy because they feel they are thus getting in on a sure thing. Very often, they buy too late just before a stock has reached on of its peaks. Then they get caught and suffer losses when the price breaks even a few points.
http://www.sap-basis-abap.com/shares/simple-stocks-purchase-principles.htm
The Ultimate Buy and Hold Investor: Anne Scheiber
The Ultimate Buy and Hold Investor: Anne Scheiber
Anne Scheiber, who died in 1995 at the age of 101, became an investing legend after her death.
She took $5,000 in the 1940s, invested it in the stock market, and when she died was worth $22 million. Not shabby.
How did she do it? Patience. Discipline. And investing in the best companies in America. From Time Magazine:
By the time she retired from a $3,150-a-year auditor’s job at the Internal Revenue Service in 1943, she was already investing her $5,000 savings account in a stock portfolio. During her career reviewing other people’s assets, she had noticed that most who left substantial estates had accumulated their money through common stocks. So Scheiber, who had earned a law degree and passed the Washington bar exam before joining the irs, studied the stock markets with the same precision that she had applied to reviewing tax returns.Fond of movies, she first invested in Hollywood studios, including Universal and Paramount, and kept a tally of their attendance rates. She also bought stock in about 100 blue chips and large franchise corporations, such as Coca-Cola and PepsiCo, and drug companies like Bristol-Myers Squibb and Schering-Plough. Her investments grew quickly, says William Fay, her stockbroker for 25 years. “After World War II, stocks really took off. While $5,000 sounds like a nominal amount, it could have increased fivefold in five years,” says Fay, who retired from Merrill Lynch two years ago. At Scheiber’s death, her portfolio had increased more than 4,000 times. Especially profitable were 1,000 shares in Schering-Plough that she had originally bought in 1950 for $10,000; by 1994 they had grown to 60,000 shares worth $4 million.
You think you can’t do it. Why not? She did.
If you hold the stock market long enough, you’ll make money. As it turns out over the last 100 years- you would have made a lot of it.
Her strategy? From Time:
Her strategy was simple: don’t worry about daily market fluctuations; reinvest dividends; hang tough.
Too many investors spend too much time obsessing over 50 cent increments in their stock price. They look at their portfolios on-line daily (sometimes hourly or several times an hour.) They fret over one 20% drop (or have a “sell” order if the stock does ever drop that much.) They don’t look to invest for the long haul- which is ten years or more.
The question to be asked, however, is: if what Anne Scheiber did seems so easy (who doesn’t know the top 50 stocks in the country right now? What if you put $100 into each tomorrow?)- where are the other Anne Scheibers?
It turns out that discpline and patience are rare attributes. Not many investors have it (or they’d all be as rich as she was.)
You can learn those skills.
Interestingly, on various websites that repeat her remarkable story, they don’t get it right. They say things like she was a billionaire when she died (um…no.) Another one said she invested a little here and there. Um…no. And others act like she didn’t know what she was doing (according to Time Magazine she actually attended shareholder meetings and asked questions.)
Just because she was a “little old lady” when she died at age 101, doesn’t mean she was clueless.
She made more money than many on Wall Street.
She proved it doesn’t take fancy insider information. It doesn’t take buying the next “great” thing (she bought established companies.) It does take buying companies that make money and holding them.
Afraid it’s too late for you because you’re, gasp, old? She was no youngster herself- beginning when she was well into middle age.
What’s your excuse?
While most people become poorer the older they get, Anne Scheiber became wealthier.
1. Anne Scheiber died in 1995 at the age of 101. For years she had lived by herself in a tiny run-down apartment in Manhattan. The paint on her walls was peeling and everything was covered with dust. Scheiber lived on Social Security and a small monthly pension which she began receiving when she retired from the IRS in 1943. At age 51, when she retired, she was making only $3,150 per year. Those who knew her say she was the model of thrift. She didn’t spend money on herself. When her furniture wore out, she kept on using it. She wouldn’t even subscribe to a newspaper, rather she went to the library once per week to read The Wall Street Journal. Norman Lamm, the president of Yeshiva University was literally blown away when he learned that this poor old woman left her entire estate to his university – $22 million! How did she do it? One day at a time. She had managed to save $5000 by the time she retired in 1943. She invested that in stocks. "By 1950, she had made enough profit to buy 1000 shares of Schering-Plough Corporation stock, then valued at $10,000. And she held onto that stock, letting its value build. Today those original shares have split enough times to produce 128,000 shares, worth $7.5 million"
2. Anne Scheiber understood the value of investing for the long haul. Whether her stocks went up or down, she never sold it off. When she earned dividends, she kept investing and reinvesting them. While most people become poorer the older they get, she became wealthier.
To Invest is not enough We must make Wise Investments.
Anne Scheiber could have invested her nest egg unwisely and died penniless. She became wealthy because she wisely invested her resources.
http://www.barberville.net/sermon246.htm
2. Anne Scheiber understood the value of investing for the long haul. Whether her stocks went up or down, she never sold it off. When she earned dividends, she kept investing and reinvesting them. While most people become poorer the older they get, she became wealthier.
To Invest is not enough We must make Wise Investments.
Anne Scheiber could have invested her nest egg unwisely and died penniless. She became wealthy because she wisely invested her resources.
http://www.barberville.net/sermon246.htm
The Story of Anne Scheiber: Discipline Trumps Math Ability
April 12, 2007
The Story of Anne Scheiber: Discipline Trumps Math Ability
Consider the remarkable case of Anne Scheiber. She represents not only the superb returns that can be enjoyed from a dedicated and systematic buy and hold strategy, but also the pluck to jump back in the game after losing everything...
She didn't do it with high-flying internet stocks. What's even better, Anne's time-tested investing style is important because it embodies one of three criteria for achieving great results.
It's a simple strategy and can be used by anyone — even small investors.
She relied on patience and sticking with her investment strategy - and above all the discipline to keep adding to her investments on a regular basis and over a long period of time.
On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to invest $5000 over the next ten years. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million!
Her secret?
Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in the production companies like Columbia pictures. She drank Coke and Pepsi and bought shares in both. She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on.
Once can achieve the same thing by investing in a mutual fund, if you don't know what stocks to pick OR more importantly, if you're just starting your portfolio and you need diversification to blot out risk. (See: All Risk is Not Created Equal)
She invested regularly and with discipline -- making it the first priority BEFORE she had the latest Manolo's, Prada or Gucci -- through thick and thin for over forty years. Through the bear market of 1973-1974. Through the crash of 1987.
She invested in herself first so later she could have any designer she wanted!
Don't be misled or confused about the need for intricate trading strategies, greater math ability, or get rich quick 'secrets'. (There are none!)
It's about a conscious choice you're going to make today that says: "I can do this; I can own the responsibility for my financial future; and I can do it without pain. I can start right where I am today and still make an impact!"
Discipline -- a dedicated and systematic investment approach -- trumps sophisticated market knowledge. Combined with Diversification and a Longer-Term holding period, you have the only formula you need for success in investing.
Remember, the Tortoise and the Hare fable -- Slow and steady wins the race!
http://the411.typepad.com/weblog/2007/04/the_story_of_an.html
The Story of Anne Scheiber: Discipline Trumps Math Ability
Consider the remarkable case of Anne Scheiber. She represents not only the superb returns that can be enjoyed from a dedicated and systematic buy and hold strategy, but also the pluck to jump back in the game after losing everything...
She didn't do it with high-flying internet stocks. What's even better, Anne's time-tested investing style is important because it embodies one of three criteria for achieving great results.
It's a simple strategy and can be used by anyone — even small investors.
She relied on patience and sticking with her investment strategy - and above all the discipline to keep adding to her investments on a regular basis and over a long period of time.
On her modest salary as an auditor for the Internal Revenue Service (just over $3000 a year), she managed to invest $5000 over the next ten years. When she died in January 1995 at the age of 101, that modest investment had grown to $20 million. That's not a misprint. $20 million!
Her secret?
Miss Scheiber invested in stocks of companies that she knew and understood. Companies whose products she used. She loved the movies. So she invested in the production companies like Columbia pictures. She drank Coke and Pepsi and bought shares in both. She invested in the companies that made medications she took - Schering Plough and Bristol Myers Squibb. And so on.
Once can achieve the same thing by investing in a mutual fund, if you don't know what stocks to pick OR more importantly, if you're just starting your portfolio and you need diversification to blot out risk. (See: All Risk is Not Created Equal)
She invested regularly and with discipline -- making it the first priority BEFORE she had the latest Manolo's, Prada or Gucci -- through thick and thin for over forty years. Through the bear market of 1973-1974. Through the crash of 1987.
She invested in herself first so later she could have any designer she wanted!
Don't be misled or confused about the need for intricate trading strategies, greater math ability, or get rich quick 'secrets'. (There are none!)
It's about a conscious choice you're going to make today that says: "I can do this; I can own the responsibility for my financial future; and I can do it without pain. I can start right where I am today and still make an impact!"
Discipline -- a dedicated and systematic investment approach -- trumps sophisticated market knowledge. Combined with Diversification and a Longer-Term holding period, you have the only formula you need for success in investing.
Remember, the Tortoise and the Hare fable -- Slow and steady wins the race!
http://the411.typepad.com/weblog/2007/04/the_story_of_an.html
Buy-and-Hold: Golden Strategy That Takes an Iron Will
Buy-and-Hold: Golden Strategy That Takes an Iron Will
Anne Scheiber's life was no happy tale. Embittered after the federal government failed to promote her from her IRS auditing job at the end of 1944, she retired and spent the next 51 years mostly alone, living on the Westside of Manhattan.
Her only hobby was investing. She apparently put every penny she had into stocks, rarely selling, her broker would later explain.
By the time she died in 1995, Scheiber had amassed a $22-million fortune in about 100 stocks--all of which she left to a stunned, but grateful, Yeshiva University.
If Scheiber's story is something of a cliche--"aged, frugal recluse buys and holds stocks, leaves millions to charity"--it's too bad we all can't be beneficiaries of such cliches.
But then, many investors have in fact benefited handsomely in the 1990s from the same basic investment philosophy: Just buy stocks and don't sell them. Period.
The proven long-term success of buy-and-hold is the basis for the retirement savings plan boom of the past decade, of course. Americans are encouraged to invest regularly in the market, avoid the temptation to sell when stocks suddenly sink, and trust that when retirement happens in 10, 20 or 30 years, a hefty nest egg will be there to fund it.
And why doubt that? Since Dec. 31, 1989, the Dow Jones industrial average has risen 192%, from 2,753.20 to 8,031.22 at Friday's close.
Even better: Measured from the start of the 1980s bull market on Aug. 13, 1982, the Dow has increased a spectacular tenfold.
What's more, if buy-and-hold still is good enough for Warren Buffett--perhaps the greatest living spokesmodel for that investment style--it still should be good enough for the rest of us, right?
Yet as stock prices have zoomed this year, adding to the huge gains of 1995 and 1996, many investors have understandably grown uneasy. The nagging worry is that stocks might have reached such historically high levels that buying and holding at these prices may never pay off.
On days like Friday--when the Dow sank 156.78 points, or 1.9%, as bond yields surged on concerns about the economy's growth rate--investors' darkest concerns about the market's future can surface.
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Is there a danger in trusting buy-and-hold at this point?
Certainly not if you have 51 years, like Anne Scheiber did. Academic studies show that the longer your time horizon, the lower the possibility of losing money in stocks.
That's not terribly surprising: Over time, the economy's natural tendency is to grow, because humankind's tendency is to strive to achieve more. If you own stocks, you own a piece of the economy--so you participate in its growth.
But over shorter periods--and that includes periods as long as a decade--it is indeed possible to lose money in stocks. Consider: The Dow index was at 890 on Dec. 31, 1971. Ten years later, on Dec. 31, 1981, the Dow was at 875. Your return after a decade of buy-and-hold was a negative 1.7%.
True, the 1970s were a miserable time for financial assets overall, as inflation soared with rocketing oil prices, sending interest rates soaring as well. But we don't even have to look back that far to discover just how difficult it can be to stick with a buy-and-hold strategy.
From the late 1980s through 1991, major drug stocks such as Merck & Co. and Pfizer Inc. were among Wall Street's favorites. They were well-run businesses, and the long-term demand for their products seemed assured.
By December 1991, Merck was trading at $56 a share, or a lofty 31 times its earnings per share that year.
Then came the Clinton administration's push for national health care. Suddenly, the drug companies found their pricing policies under attack. The stellar long-term earnings growth that Wall Street anticipated seemed very much in doubt. And the stocks fell into a decline that lasted more than two years and which shaved 40% to 50% from their peak 1991 prices.
Merck, for example, bottomed at $28.13 in 1994, which meant a paper loss of 50% for someone who bought at the peak in 1991.
If that had been you, could you have held through that horrendous decline? You should have: Today, Merck is at $98.81 a share, or 76% above its 1991 year-end level. After restructuring its business, Merck's earnings began to surge again in 1995 and 1996.
And this year, the drug stocks have once again become market darlings. But therein lies the problem: Merck is again trading for a high price-to-earnings ratio--26 times estimated 1997 results.
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That doesn't necessarily mean that Merck is primed to drop 50%, as it did in 1992-94. But it does mean that if you own that stock--any stock, for that matter--you must allow for the possibility of a deep decline from these current high levels, something much worse than the just-short-of-10% pullbacks the market has experienced twice in the last 14 months.
Anne Scheiber, angry recluse that she was said to be, somehow managed to show no emotion at all about the stock market's many ups and downs in her 51 years of investing. A cynic might say she had nothing on which to spend her money, anyway. But the point is, she managed to remain true to buy-and-hold, when many other investors were probably selling out at the market's lows.
Mark Hulbert, editor of the Hulbert Financial Digest newsletter in Alexandria, Va., and a student of market history, worries that too few investors will have Scheiber's iron stomach when the tide eventually turns for the market overall, as it did for the drug stocks in 1992.
"I am cynical about all of these people genuflecting at the altar of buy-and-hold," Hulbert says. "They're not buy-and-hold--that's just what is working now," so investors are happy to go with the flow, he says.
Most investors, Hulbert maintains, are too new to the market to imagine how psychologically painful a major and sustained loss in their portfolio would be.
What is key to judging how much of your assets should be in stocks is your tolerance for risk, your tolerance for loss and, of course, your time horizon. But as a simple rule of thumb, many Warren Buffett disciples like to use this line: If, for whatever reason, you can't take a temporary, 50% loss in your portfolio, then you don't belong in the stock market.
For the relative handful of pros who really invest like Buffett, what the market does on a short-term basis isn't important. Their faith in buying and holding stocks derives from their long-term faith in the underlying businesses.
George Mairs, the 69-year-old manager of the $324-million Mairs & Power growth stock fund in St. Paul, Minn., owns just 33 stocks in the fund. He is among the least active traders in the fund business--he almost never sells. And his results speak for themselves: Mairs & Power Growth has beaten the Standard & Poor's 500 index every year in this decade.
Does Mairs fear that buy-and-hold isn't a great idea at these market levels? Hardly. High-quality stocks aren't cheap, he says, but neither does he find them to be drastically overpriced. "It's the long-term earnings stream that we look at," he says. "If the earnings are going to be there, we don't worry too much.
"What we want to do is own businesses," Mairs says. "If we like a business for the long term, we don't worry about what the stock value is on a week-to-week basis."
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How Patient Can You Be?
"Buy and hold" sounds great on paper, but it can require enormous patience. Major drug stocks, for example, soared 94% between March, 1990 and December, 1991, as measured by the Standard & Poor's index of five major drug companies. But when the threat of federalized health care surfaced in 1992, drug stocks began a sustained decline that lasted more than two years--and slashed the S&P drug index by 42%. With the stocks again rocketing this year, 1992-1994 stands as a sobering reminder of how bad things can get. S&P drug stock index, quarterly closes and latest
Source: Bloomberg News
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