Some people have given up on buy-and-hold investing. After two big crashes in just over a decade, holding individual stocks for long periods strikes some investors as downright preposterous.
Nonetheless, it remains Warren Buffett’s favourite method. He points out that “lethargy bordering on sloth remains the cornerstone of our investment style.”
If you keep track of the stocks you sell, you may come to see the Sage of Omaha’s point. Problem is, most people promptly forget about companies after they’ve sold them. The stocks might go on to outperform, or to flounder, but they’ll never know.
To illustrate why tracking the stocks you sell can be useful, consider a story told by money manager Robert Kirby about a couple he worked with as an investment counsellor.
The wife’s portfolio was managed for many years in a fairly standard fashion with many buys and sells along the way. But, unknown to Mr. Kirby, the husband piggybacked on his advice and added a twist. The husband only bought the stocks recommended to his wife and never sold.
The situation came to light when the husband passed away and the wife brought in his portfolio to be managed. By that time it was an odd looking collection of stocks, which contained many small positions and a few gigantic ones.
As it turned out, the husband had made a fortune and significantly outperformed his wife who swapped stocks along the way.
Think about your own experience. Sure, you’ve likely encountered some real stinkers along the way. (Many more if you failed to buy at sensible prices in the first place.) But you might be surprised to discover that you sold a few winning stocks far too early.
A peculiar investment trust put the buy-and-hold experiment into practice many years ago.
The trust takes passivity to such an extreme that it makes many index investors look like a bunch of drunken day-traders.
Way back in 1935 the trust was set up to follow 30 large dividend-paying U.S. stocks. From then on, it simply held the stocks until mergers, spinoffs, or bankruptcies forced a change. Any new money, say from dividends, was added to the portfolio by simply reinvesting it in the remaining stocks.
The trust is still around today and goes under the ING Corporate Leaders name. In a slight change to its original mandate, the trust’s “B” series gives the nod to non-dividend stocks whereas the original trust required dividend payments from its shares.
Even after allowing non-dividend payers, the trust’s B series now holds only 22 stocks and, just like Mr. Kirby’s example, its portfolio is a little lopsided – 13.7 per cent of the trust’s money is invested in Exxon Mobil with another 11.3 per cent in Union Pacific. Its smaller holdings include AT&T, which represents less than 2 per cent of assets.
Such oddities haven’t hurt its performance. The trust gained an average of 11 per cent a year over the 40 years ending 2011 – beating the Dow Jones industrial average, which climbed 6.8 per cent a year.
In more recent times, the trust generated average gains of 7 per cent a year for the 15 years ending 2012, which surpassed the 4.6-per-cent annual gains for the S&P 500, according to Morningstar.com.
To be fair, the trust now looks very different than either the Dow or the S&P 500, which goes some way to explaining the performance difference.
In addition, if one were to start a similar effort today, it would likely begin with an initial portfolio that looks much more like the S&P 500 or a large-cap dividend-focused index.
Still, the trust’s performance suggests that lethargy bordering on sloth might actually prove to be far too energetic when it comes to investing. It’s something worth considering the next time you get the urge to sell a stock.
When you do sell, be sure to keep track of how you would have done had you held on. You might be surprised to learn that selling turned out to be the wrong move.
Special to The Globe and Mail