It is tempting to see Michael Dell's leveraged buyout of Dell Inc. as an example of why buy-and-hold investing is for chumps. On Tuesday, Mr. Dell and Silver Lake Management said they will take the computer maker private at $13.65 (U.S.) a share – or 77 per cent below the stock's high point almost 13 years ago.
But, if anything, the Dell deal illustrates why a buy-and-hold approach works so well, even for volatile industries that are buffeted by change.
Eddy Elfenbein at Crossing Wall Street pointed out that Dell went public in 1988 at $8.50 – but the shares have since split an astounding 96-for-1, meaning that the adjusted initial public offering price is just 8.85 cents.
In other words, if you had bought the stock at the IPO price – it fell considerably lower by early 1990, giving you plenty of opportunity to buy-in low – and held through the technology bust in 2000, the financial crisis in 2009 and concerns about the future of the personal computer late last year, you would still be ahead more than 15,000 per cent. An initial investment of $2,000 would be worth more than $300,000 by the time the stock is removed from trading.
To be sure, the $24.4-billion LBO might frustrate many investors who had been betting on a resurgent Dell – those who bought into the strategy of diversifying beyond personal computers and into servers, software and business services; and who saw the billions of dollars in annual net operating cash flow as a reason to believe that the annual dividend of 32 cents a share would rise considerably.
For them, the LBO looks opportunistic: Mr. Dell and Silver Lake are getting all the upside potential at a deeply discounted price – at least, relative to where the price stood five years ago.
And while the comparison between the takeout price to the IPO price might reward long-long-term investors, it doesn't do much to ease the pain among those who have held the stock over the past 15 years and have nothing to show for their patience.
However, rather than skewering the advantages of buy-and-hold investing, the ups and downs of recent years merely illustrate how important it is to avoid stocks with absurd valuations. The real casualties among Dell shareholders are those who bought near the peak of the technology bubble in 2000 – Dell shares then traded for more than 60-times trailing earnings. Today, its PE ratio has shrivelled to about 8.
Meanwhile, the decision to take the company private might in fact be due, at least in part, to the fickle nature of most investors, who simply cannot endure turnarounds that take time and come with occasional setbacks.
"Dell has made solid progress executing [its long-term] strategy over the past four years, but we recognize that it will still take more time, investment and patience..." Mr. Dell said in a statement.
He feels that time and patience have no place in the stock market. Sadly, he's probably right.
David Berman