Making the Case for Buy and Hold

Yahoo Tech Ticker has a video and article up featuring an interview with Lakshman Achuthan from the Economic Cycle Research Institute (hat tip to Barry Ritholtz). My internet connection is not fast enough to watch the videos on that site (one of the tradeoffs of living in the woods) but I was able to get the gist from the article.

Achuthan feels we are in for more boom and bust cycles and, with that backdrop, he feels buy and hold is not the best strategy. The comments were also interesting, ranging from "they're all crooks," to Bogleheadesque comments, to comments agreeing with Achuthan.

Framing the argument in such definitive terms doesn't make sense to me. We all know that the S&P 500 was down 24% on a price basis in the last decade; adding in dividends it was down 4.5% for the decade. Whatever the result of the index, obviously some stocks did better than the index and some did worse.

For the decade, Caterpillar (CAT), a client holding, was up 142%. While there were a couple of trading opportunities along the way, someone who held on for the entire decade added a lot of value with the pick. Even someone holding on during a couple of big declines for the name had a lot of luck with it for the decade.

Contrast that with Citigroup (C) which was down 91% for the decade. The stock spent most of the decade between $40 and $50 before rolling over in 2007. I've never owned Citi so I can't really pinpoint exactly when the story changed, but after doing OK for quite a few years the story did change. I can only relate the financial stocks I sold - Bank of America (BAC) for buying Merrill Lynch, Barclays (BCS) in December 2007 because the UK was obviously in trouble and Allied Irish Bank (AIB) in June 2008 as Ireland appeared to be deteriorating faster than most other countries. BAC was a very specific event and the other two were more nuanced than that.

Another example of a stock that was generally better to hold was ITT (ITT), not a name I own but recently profiled in Barron's. It was up 274% for the decade.

Over the next decade, assuming that Achuthan is correct, there will be stocks that outperform the index and stocks that lag it. In a portfolio of, for example, 50 stocks assembled today it is a very good bet that a bunch will indeed turn out to be good holds for the entire decade and that a bunch more will not. While I hope that is an obvious point, it is also true.

Anytime a stock is purchased there are reasons for that purchase that are either bottom up, top down or a mix of the two. Forgetting about any tactical moves tied to sizing down or the like for a moment, as long as the bottom up, top down or mix of the two that made the stock a buy are still in effect then, generically speaking, there is no reason to sell. When the story matures, evolves or proves out as being incorrect the stock is a sale. When has that ever been different?

I've said many times that I expected to hold Bank of America forever but it did not work out that way. After more than four years I sold it. I have some stocks that have been in client accounts since 2003 (before I joined Your Source Financial). I expect to hold these few names forever but if one of then does the equivalent of buying of Merrill Lynch then it would need to be sold. Again, when has this ever been different?