Buy and Hold, Not Buy and Sold
As Philip Carret was wont to say: Traders rarely die rich, but patient investors often do
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Louis Rukeyser of Wall Street Week once asked the great Philip Carret about the secret to his investing success.
Carret (rhymes with beret) answered with a single word:
This was no snappy rejoinder trotted out on television to impart an air of wisdom.
In every imaginable way, patience was the watchword of Carret’s life.
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Philip Carret started the Pioneer Fund (originally called Fidelity Investment Trust) in 1928 and ran it for more than half a century. A $10,000 investment with Pioneer would have grown into more than $8 million by the time Carret hung up his hat.
Provided, of course, that investors were patient and didn’t jump in and out of the fund on every hint of good or bad news. As we learned a few weeks ago, that never ends well.
As a fund manager, Carret bought carefully and sold reluctantly.
Actually, “reluctantly” might be underselling it. He absolutely HATED to sell stock.
Carret researched opportunities, calculated the plusses and minuses and future returns, pulled the trigger at the right price… and, then, nothing.
He didn’t sell out after prices soared — or bail out during an unexpected downturn. He stiff-armed FOMO whenever other people’s (riskier) investments looked headed to the moon while his own spun their wheels on the tarmac.
Carret had diamond hands before it was cool.
“I have a very simple strategy,” he told Jason Zweig in 1994. “I buy good companies at attractive prices — then I sit on them.”
“There’s no point in taking profits and paying taxes. Turnover usually indicates a failure of judgment. It’s extremely difficult to figure out when to sell anything. So I’d much rather have the stock taken away from me in a merger or a buyout. It’s much easier.”
If this all sounds a bit like Warren Buffett’s preferred holding period of forever, you won’t be surprised to learn that Buffett and Carret formed something of a mutual admiration society over the years.
Carret’s connection with the Buffett family actually began with a stock tip from Warren’s father, Howard, who ran a small brokerage firm in Omaha. On one visit, the elder Buffett recommended Greif Bros., a Cleveland-based cooperage company, to Carret — and that turned into a fifty-bagger.
And, in typical Carret style, he still owned his stake in Greif (as it came to be known) more than fifty years later.
(As an aside, Carret also subscribed to the Buffett/Munger school of longevity, living until the age of 101 and working right up until the end.)
The Greif Bros. windfall, though, was not Carret’s most profitable brush with the Buffetts. He had been an investor in Blue Chip Stamps and received Berkshire Hathaway stock (at a minuscule $235 cost basis) after Buffett merged the stamp company into his conglomerate.
Obviously, Carret never sold his Berkshire stock. No matter how much it shot up in price over the years.
If he had adopted a buy-and-sold approach at any of the points when Berkshire hit new impossible heights, he would have robbed himself of massive future returns. The smart money, no doubt, advised him to cash in and take profits — but Carret patiently allowed the magic of compounding to do its thing, while he did nothing.
Selling Berkshire prematurely would have cost Carret more than an entire career’s worth of mistakes added together.
And Carret did invest in the occasional dog or two:
One oil company fell from a $20 purchase price all the way down to 12 cents before he pulled the ripcord.
Carret also held stock in the Bank of New England when it failed in 1991.
The joy of buy-and-hold investing, though, is that even the occasional whoopsie barely leaves a mark when compared to a portfolio’s big winners. Bankrupt banks and failing oilers cannot compare to the upside of letting winners like Berkshire Hathaway, Greif Bros., and Neutrogena (another Carret fave) run and compound.
Warren Buffett once called Carret “the Lou Gehrig of investing” and credited him with “probably the greatest long-term investment record in this country’s history”.
And he did it all by being patient.
I don’t find criticism of buy-and-hold investing particularly compelling — mostly because it mistakes philosophy for dogma.
Critics view talk of a “preferred holding period of forever” as akin to swearing a blood oath to never sell your stock under any circumstances.
Apparently, to them, the bigger threat to investing success comes from holding onto shares for too long and missing the optimum time to sell, rather than jumping in and out of positions in an attempt to time the market.
That couldn’t be further from the truth.
And it makes me wonder just what stock market these people are studying.
Here’s an all-too-familiar scene on Wall Street:
At the slightest bump in the road — or, even, just rumors of an upcoming bump — many investors stream for the exits. And, in times of greatest trouble, they shove each other out of the way to be the first ones on the life raft — thereby locking in paper losses — and sneer at those choosing to stay the course.
What’s not as familiar?
Stories of investors erring on the side of rigid buy-and-hold principles. Of poor, unfortunate souls who bought good companies, stuck with them through thick and thin, and then lost everything. Or, even, of anyone investing this way and then underperforming the market over a number of years.
Honestly, after racking my brain, I can’t think of a single example.
That’s probably because anyone who invests in solid companies (with strong balance sheets, little debt, and steady earnings) and holds for the long haul will almost certainly turn out okay.
Any (occasional) mistake will be washed away by letting your winners run and compound for decades at a time.
True buy-and-hold investing doesn’t mean pledging to go down with the ship in the unfortunate event of corporate fraud or other unforeseen disaster, but rather committing to a long-term mindset and only investing in those companies that have earned your strongest conviction.
Seems like a no-brainer to me.
I often think of this passage from Peter Lynch’s One Up on Wall Street:
If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch — the thirty days when stocks had their biggest gains — your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward.
A key reason to adopt a buy-and-hold approach is that the market doesn’t rise in a linear fashion. Even if a company’s earnings increase consistently over time, the individual stock still moves in random fits and starts — sometimes lagging the company’s intrinsic value and other times getting way out over its skis.
A year’s worth of gains can be won in just a few days.
Or missed, if you didn’t happen to be invested on those days.
If the S&P 500 increases by 12% in a year, that doesn’t mean it will go up by 1% each month in a straight line. Some months (or weeks or days) will post huge gains, while others will remain flat — or go down.
Maybe your crystal ball is better than mine, but I know that I can’t tell when those big days, weeks, or months will happen. And, even if I had a hunch, I wouldn’t want to risk my money on it.
When it comes to putting money to work in the market: Be there or be square.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.