Buy and Hold Stocks: Why This Investing Strategy Is Dangerous for Your Portfolio

by Mark Skousen Wisdom of Wealth Wisdom of Wealth

Buy and Hold Stocks: Why This Investing Strategy Is Dangerous for Your Portfolio

by Mark Skousen, Chairman, Investment U

Monday, July 24, 2006: Issue #562

"Never marry a stock." Jesse Livermore

In today's issue, we'll review why the buy and hold stock investing strategy can prove perilous to your portfolio. But first, a little background

Last week, I was at my home in Florida going through my library. My wife is always complaining that I have too many books. Another version of Parkinson's Law seems to be at work: Books fill the space available. No matter how many rooms and bookshelves we have in our home, I never seem to have enough shelf space for all my titles.

I did come across a 1960s title that I could not part with: The Money Game, by "Adam Smith," a pen name for George Goodman, a financial columnist for New York Magazine. I found it ironic that he never actually quoted Adam Smith, the father of free-market economics and author of the 1776 best-seller, The Wealth of Nations.

Rather, Goodman constantly cited Adam Smith's nemesis, John Maynard Keynes, the British interventionist. No wonder Keynesian Paul Samuelson calls Goodman's book a "modern classic."

Let's see how one of this "classic's" predictions unfolded in the stock market

The Strange Case of Three "Solid Growth" Buy and Hold Stocks

In The Money Game, Goodman identifies "three sisters of solid growth" - companies that "everyone" on Wall Street agreed were so "solid" for the long term that you could buy and take delivery of their stock certificates, deposit them in a safe deposit box, and your heirs would be wealthy beyond their dreams by simply holding on for dear life.

What were these stocks? Goodman named:

  • International Business Machines (NYSE: IBM)
  • Xerox (NYSE: XRX), and
  • Polaroid

Here's what happened to these three "sure-fire" winners over the last couple of decades

1. Big Blue Suffers the Buy and Hold Blues

First, International Business Machines. As the chart below indicates, IBM stock went nowhere for 30 years, and was actually selling for less by 1995, after suffering a $5 billion loss (which at the time was the largest single corporate loss in U.S. history).

Buy and Hold failure

Ultimately, how many investors could have withstood 30 years of "no gains" and stayed fully invested in their favorite stock?

2. Xerox Gets "Copied" Too Many Times

While IBM started recovering, Xerox took a turn for the worse in 2000. As its chart demonstrates, Xerox, which had a virtual monopoly on the copying machine, almost destroyed itself in the past five years under intense competition from Hewlett-Packard, Canon and other competitors worldwide. It is only now starting to recover.

Xerox Stock Chart

3. Polaroid Disappears

Finally, there's the Polaroid story. There's no price chart for this stock for good reason. Despite having a monopoly patent on its instant film cameras, which it defended and won in court against Kodak, Polaroid made the critical mistake of entering the digital photography market late. It filed for bankruptcy in October 2001, and most of its business was thereafter carried on by the Polaroid Holding Company, managed by Bank One.

Interestingly, while executives of the company left with large bonuses, the stockholders and employees got nothing.

What's the lesson? There's no such thing as a "buy and hold" stock. You must be eternally vigilant on the fundamental outlook of your favorite investments especially in today's three "golden growth" stocks:

Good investing,

Mark

Today's Investment U Crib Sheet

  • The Money Game was originally published in the go-go years of the late 1960s, and it's still in print! You can find it on Amazon.
  • Lou Gerstner, who bailed out IBM, wrote an excellent book called Who Says Elephants Can't Dance? Search for this one at Amazon, too.

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