Dividend Paying Stocks have lower downside risk

In a down market, a defensive stock is sought after by investors as it is a safe haven to park money while still earning a steady dividend income at the same time.   Defensive stocks are usually companies that have huge cash piles and are likely to pay out good dividends to investors even if the share price had slipped lower.
Stocks paying significant dividends have less downside risk than other stocks as long as the dividend isn't threatened.  Of course, the biggest advantage of dividend stocks is that you get paid just to hold them.
Contrast that to the usual situation where the only way you make money on a stock is by selling it someone else at a higher price. That doesn’t mean that dividend stocks won’t go up in price.  Some studies show that dividend payers actually outperform non-dividend stocks in total return.
Stocks with solid dividend prospects don’t go down as much as other stocks, because when they start fading, the resulting rise in dividend yield attracts more buyers.  Dividend yield is the estimated dividend payouts over the next 12 months divided by the price you pay for the shares.  For example, if a company share price is $100 and a dividend of $6 per share is paid, the result is a 6% dividend yield.
The top-yielding stocks now are frequently real estate investment trusts, or REITs. REITs invest in real estate such as apartments, shopping centers, office buildings, and storage facilities. They tend to specialize in one or two of the areas. Because of their legal make-up, they are required to distribute virtually all of their earnings to the shareholders.
The dividend strategy is safest if you have a diversified portfolio. You essentially create your own little mutual fund. You also need some time, at least five years, to give the strategy a chance to produce results.
A company has to have cash to pay dividends.  Unlike earnings figures, it can't be manipulated because it's actual cash paid to shareholders.
However, dividend-paying stocks tend to lag when the market is rising sharply, but the dividends act as a cushion when stock prices are falling.
One of the basic rules of life also applies to successful investing -- success is highly dependent upon a combination of hard work, intelligence, and honesty.

http://www.sap-basis-abap.com/shares/dividend-paying-stocks-have-lower-downside-risk.htm

Stocks Vs Unit trust or Mutual Funds

This question about stocks vs unit trust or mutual fund is a very broad one and it very much depends on your personal goals, as to which is better for you.
The first obvious difference between stocks and unit trusts is that for stocks, you have to do your own research in order to select which stocks to buy and sell, whereas for unit trusts you delegate the management of capital to the unit trust manager.
What this obviously means is that if you intend to buy/sell stocks on your own you will need to allocate a significant portion of your time into researching stocks and keeping an eye on your investments, and if you wish to manage a large portfolio this may take up a considerable amount of time. People who have full-time jobs in non-finance related industries may have difficulty devoting the amount of time necessary to produce a reasonable return on their investments. Heck, even those in finance industries are unable to find time to manage their own money. Indeed, deciding to plunge into stocks can be a costly experience especially in the early years when one has not gained the critical amount of knowledge and experience. The learning curve is steep and the costs involved in learning lessons, also called your 'tuition fee' can involve a significant hit to your capital base.
Thus the obvious alternative is to either let the money sit in the bank account or in fixed return securities (an option which I think is far underrated) or to delegate your capital into the hands of a investment manager. This presents another set of problems because now you have to evaluate the competence of the unit trust managers, and you also have to beware that you do not pay excessive charges. Furthermore, it is a well known fact that most money managers underperform the stock market indices despite the fact that investing in index funds involves much lower charges, since they are passively managed.
My answer to the question is that both stocks and unit trusts are good, depending on whether the investor is able to develop the competence and devote the time into learning about them and to evaluating their chosen vehicle of investment. Learning how to analyse individual stocks will involve learning how to analyse financial statements, competitive strategy, valuation and a whole host of other investment analysis tools. Learning how to evaluate unit trusts will require an understanding of macroeconomics and the various unit trust strategies (global macro/sector rotation/country analysis etc.)
In otherwords, it doesn't matter which approach you choose, if you want satisfactory results, you have to do your homework.
So, where does that leave the investor who does not have much experience or knowledge of investing and does not have the time to devote into acquiring it?
My answer is index funds. Yes. These are lovely since they outperform 2/3s of all actively managed funds over the long run. They involve low management fees and can give you peace of mind, as long as you are dedicated to investing for the long run (5+ years or more) and have the discipline to follow a simple saving/investment plan.
But of course, most people like to get their hands dirty and like the feeling of being in charge of their destiny - few want to be simply 'above average', they want to make lots of money.
Well, that is possible. If you have the brains, balls, and hardwork, you might be successful as an investor. But many have tried and have just ended up as mediocre underperforming investors who would have been better off just sticking their money in the index funds.
Which kind of investor are you? What risks are you willing to take?
That's a question only you can answer. 

http://www.sap-basis-abap.com/shares/stocks-vs-unit-trust-or-mutual-funds.htm

A True Success Story Of a Shrewd Investor

From time to time, new paper features stories of shrew investors of modest income who surprised their friends and relatives by leaving substantial fortunes accumulated in the stock market.  A close study, of these cases usually reveals that careful timing and patience, rather than any mysterious secret or fantastic luck, were the explanation of the success story.  Students of the stock market are indebted to the Chicago newspapers for coverage, early in February, 1955, of the story of Miss Ida Mighell of Aurora, Illinois.  Miss Migehell had died on January 1 1955, at the age of eighty-six and left an estate appraised at just under two million dollars.  Even close friends had assumed that her income had consisted of the salary, or pension, of a Chicago school teacher plus income from a twelve thousand dollar inheritance received forty-five year before.
 
She also owned real estate, government bonds, and some local or thinly traded stocks.  It is immediately apparent that not all of Miss Mighell's selections have been outstanding growth situations, such issues as Westinghouse Air Brake, Kennecott, and Pennsyvania Railroad have failed to keep pace with the Dow Joes averages and even the portfolio's third largest holding, American Telephone and Telegraph did not raise its dividend for  thirty-six years.  A few highly  profitable transactions more than offset an equal number of mediocre of poor deals in Miss  Mighell's account, as has been the case in the experience of most successful investors.
 
It is unfortunate that information regarding the cost prices and purchase dates of Miss Mighell's stocks is not  available,  but we can reasonably surmise that many items were originally purchased many years ago and swelled the fund with their dividends.  For example, the odd amounts of Consolidated Natural Gas, Mission Corporation, and Mission Development Company were in all probability, received as dividends on Standard Oil of New Jersey held in the 1930's.  The mere factor of compound interest has done much to increase this fund, the elderly  spinster with a modest standard of living probably reinvested all of her after-tax dividend income in recent years.
 
It is also quite apparent from Miss Mighell's choice of stocks that liberal income was not her principal criterion of selection.  Most of the larger holdings, such as  Standard Oil of New Jersey, Westinghouse Electric, Union Carbide, and Chicago Corporation, have been quite conservative in their payouts through the years and have been consistently reinvested a substantial percentage of their  profits.

Miss Mighell apparently did not aim to get rich in a hurry.  There is not a  single electronic or space age stock in the portfolio, and oil stocks are of large companies.  Although many American fortunes have been created by buying common stocks of "infanct industries" and holding them until they grow to maturity, it is notable that all of the larger holdings in the Mighell portfolio were stocks of companies which were already dominant factors in established industries in 1914, when this shrewd lady first began to invest.  No spectacular new listings of the post World War II era are included.

http://www.sap-basis-abap.com/shares/a-true-success-story.htm

The Average Investor Is Better Off Trading Long-Term

By Arthur, The Stock Investor Home
Investor are often reminded by the stockmarket that their shares value can go up (the bull) as well as down (the bear).  That is why people who tried to time the market can never beat it.  It is also the number one reason why people who tried to time the market will only end up losing money again and again.
 
One of the best time study was to "sell in May" and keep away from the market.  This is a method which was once used by traders and coined by the Hirch organization who publish the Stock Traders Almanac.  What they published was a fascinating stat that says that since 1950, if you invested $10,000 in the market at the beginning of November and held it to April of every year, you would have $536,000 currently. If you had done the same thing but invested from May to October, you would actually have a loss of $236.  You might want to give this time study investing method a tried but at your own risk.
 
Study have shown that for the average investor who have a full-time job on hand, they are better off investing for the long-term and ignore the short-term volatility of the share market.  Remember, short-term volatility is only importance to short-term investor.  As long you as you keep your long-term financial goal in mind and average the number of shares in good and bad time, the average long-term investor are going to perform much better than any short-term trader.
 
The secrets to consistently outperform any stock market indices no matter where you lived is very simple.  Since 1925, common stocks have generated an average annual rate of return of around 9-10 percent versus 3-5 percent for government bonds.  In addition, stocks have been one of the only investments that have consistently outpaced inflation over time.
 
Time is the best way to ride out any volatility.  Time have repeatedly show you that the stock market share value will recover and your share prices will once rise again.  That is why Warren Buffett favourite holding period for stock is FOREVER.  To benefits from the test of time, you must select your company stock carefully for investment.  Go for large companies such as Coca-Cola which you know that it will be around for many centuries.  Diversify your stock investment to not more than 10 companies.  Diversification works only if your don't OVER diversify.
 
No one in the stock investment world can consistently out-perform or beat the market.  Successful investor DO NOT tried to beat the market.  What they do is to keep their long-term financial goal in mind and invest using Fixed Cost Averaging, Time Diversification, and Investment Fund Diversification in Large Companies listed on stock exchange.
 
Don't bother to listen to any financial news, all they do is to constantly keep you in fear.  They are in the business of providing the financial buzz, they are not in the business to educate you to become a better stock investor.
 
To conclude, always keep your investing method simple.  Make used of the time tested formula and invested a fixed amount monthly.  Let the power of time and compound interest do it magic tricks for you.

http://www.sap-basis-abap.com/shares/the-average-investor-is-better-off-trading-long-term.htm

Meet MR. Market - Your Servant Not Your Guide

"Mr. Market" was a character invented by Ben Graham to illuminate his students minds regarding market behavior.  The stock market should be view as an emotionally disturbed business partner, Graham said.  The partner, Mr. Market, shows up each day offering price at which he will buy your share of the business or sell you his share.  No matter how wild his offer is or how often you reject it, Mr. Market returns with a new offer the next day and each day thereafter.  Buffett says the moral of the story is this:  Mr. Market is your servant, not your guide.

In March 1989, as the stock market soared, Buffett wrote:
"We have no idea how long the excesses will last, nor do we know what will change the attitudes of the government, lender and buyer that fuel them.  But we know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs."

In the last years of the twentieth century, Berkshire's price nose-dived, kicked off the diving boards by investors irrational exuberance over anything technology or Internet related, problems with the General Re acquisition, rumors of Buffett's ill health and his inability to live up to his past brilliance.  In mid-1998, Berkshire was selling at a high of $80,000; by March 2000, it was selling for almost half that much.  Buffett wrote in the 2001 annual report:

"Here's one for those who enjoy an odd coincidence:  The Great Bubble ended on March 10, 2000 (though we didn't realize that fact until some months later).  On that day, the NASDAQ (recently 1,731) hit its all-time high of 5,132.  That same day, Berkshire shares traded at $40,800, their lowest price since mid-1997."

Nevertheless, during the dark days, Berkshire's book value increased, albeit by a small amount.  And by 2005, Berkshire's share price had more than recovered.  Buffett, however, lamented that he had not captured more profits when some of his permanent holdings were wildly overpriced.

"I made a big mistaked in not selling several of our larger holdings during the Great Bubble.  If these stocks are fully priced now, you must wonder what I was thinking four years ago when their intrinsic value was lower and their prices far higher:  So do I."

When conditions are reversed, how can an investor be sure that a stock that is undervalued by the market eventually will rise?

"When I worked for Graham-Newman, I asked Ben Graham, who then was my boss about that.  He just shrugged and replied that the market always eventually does.  He was right:  In the short run. [the market is] a voting machine, in the long run, it's a weighing machine."

"The fact that people will be full of greed, fear or fully is predictable.  The sequence is not predictable."

"The market, like the Lord, helps those who help themselves."

Written by:
Warren Buffett Speaks - Wit and Wisdom from the World's Greatest Investor : Janet Lowe

http://www.sap-basis-abap.com/shares/meet-mr-market-your-servant-not-your-guide.htm

Through investing, even a tramp can become a millionaire...

Published in Investing on 31 March 2010

Through investing, even a tramp can become a millionaire...

Earlier this week, news emerged of a remarkable man who managed to amass a sizeable fortune while living rough.

Curt Degerman, from the Swedish town of Skellefteå, died of a heart attack 18 months ago at the age of 60. Local people knew Degerman as a tramp that scraped together a living by collecting scrap metal and food and drink cans for recycling. For 40 years, he lived a solitary existence, rummaging through bins for recyclables and eating leftovers from fast-food restaurants.

However, after his death, it emerged that "Tin Can Curt" was an avid reader of the financial pages and an astute investor. By reading Dagens Industri -- the Swedish equivalent of theFinancial Times -- in his local library, Degerman invested his collected deposits carefully. On his death, his fortune was estimated at more than £1.1 million.

A predictable family feud

Somewhat inevitably, news of Degerman's secret wealth sparked a family feud among his relatives. Degerman's Will left his estate to a cousin who visited him often. However, another cousin contested the Will on the basis that his father, Degerman's uncle, was the legal heir.

A Swedish judge urged the feuding heirs not to waste their money on legal fees and, instead, reach a private arrangement, which they have now done.

What's in a tramp's portfolio?

Apparently, Degerman was an academic child, but dropped out of education and mainstream society in his late teens following personal problems. So, how had he invested his money -- and what can we learn from him?

Degerman clearly knew that investing in businesses produces the best long-term returns, as the majority of his portfolio was in stock market-listed companies. Also, he knew about tax planning, because his share portfolio (worth £731,000) was held in a Swiss bank account. Degerman also saw gold as a shrewd investment: his safety-deposit box held 124 gold bars worth £250,000.

Despite never spending any money, Degerman also had £4,300 in his current account and a further £275 of spare cash at home. Thus, despite not needing any cash, he kept some liquidity at hand, perhaps to fund his next share purchase?

Other 'wiser misers'

To me, this is a familiar tale of a 'wiser miser' who amasses considerable wealth but has no interest in spending it. Similar stories of eccentric millionaires emerge frequently, often revealed by a generous charitable donation on death.

For example, in the Motley Fool UK Investment Guide, we told the tale of Anne Scheiber, a childless New Yorker who died in 1995 at the age of 101. From working as an auditor in the US Internal Revenue Service, Scheiber noticed that the very wealthy kept a large proportion of their fortune in stocks and shares.

Despite having never earned more than $4,000 a year, this recluse turned her modest income and a $5,000 nest egg into a $22 million portfolio of blue-chip businesses. On her death, Scheiber generously donated her entire estate to New York City's Jewish Yeshiva University to establish scholarships for disadvantaged female students.

Likewise, investment genius Warren Buffett lives a simple life. Despite his personal wealth of $47 billion, placing him third on the Forbes Rich List, the 79-year-old CEO of Berkshire Hathaway cares nothing for possessions.

In her brilliant biography of Buffett, The Snowball, Alice Schroeder describes how Buffett still lives in the modest house he bought in 1957 for $31,500. The Sage of Omaha also drives a 20-year-old car and only replaces appliances when beyond repair.

For Buffett, the important thing is to live by his own 'internal scorecard' -- the set of values and beliefs by which he measures himself and by which he wishes to be measured. Hence, just like Anne Scheiber, his friend Bill Gates of Microsoft and other tycoons, Buffett is a philanthropist. Indeed, he intends to leave his entire estate to charity.

In summary, by cutting your expenses to the bone and investing a large proportion of your take-home pay in big businesses (perhaps via a low-cost index tracker), you too could amass a sizeable fortune. However, I don't recommend taking this to extremes by living as a vagabond!

http://www.fool.co.uk/news/investing/2010/03/31/the-tale-of-the-millionaire-tramp.aspx

The Ultimate Buy and Hold Investor: Anne Scheiber

Written by Tracey

May 3, 2007 07:30 AM

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?

http://traceysmarketupdate.com/2007/05/03/the-ultimate-buy-and-hold-investor-anne-scheiber/

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

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

Buy-and-Hold: Golden Strategy That Takes an Iron Will

Buy-and-Hold: Golden Strategy That Takes an Iron Will

August 10, 1997|TOM PETRUNO

http://articles.latimes.com/1997/aug/10/business/fi-21077/2

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.

*

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.

*

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."

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)


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