Making the rounds on LinkedIn Corp. (ticker: LNKD) these days is a Warren Buffett quote that appeared in a 1977 Wall Street Journal article — which by now puts it just shy of 40 years old. And for the philosophy of a billionaire investor, it sounds like the stuff of folksy wisdom: “I’m having a lot of fun because I’m only going into businesses that I find interesting and where I like the people running them, and their products.”
That may explain why Buffett’s Berkshire Hathaway (BRK.A, BRK.B) over the years has filled his portfolio with companies ranging from Dairy Queen, acquired for $585 million in 1997, to Precision Castparts in August of last year — his largest deal ever at $37.2 billion, and just in time for his 85th birthday.
The former deal is easy to analyze by Buffett’s 1977 standard: It’s a snap to imagine the Oracle of Omaha licking up a Dilly Bar and saying to himself, “I like this so much, I’m gonna buy the whole company.” But Precision Castparts is another story. Buffett has infamously derided airline stocks, and age 80-something seemed an unlikely time to sink so much dough into a Portland, Oregon, outfit that makes machined airframe components.
[See: 6 Reliable Dividend Stocks Paying Out for 100 Years or More.]
Could it have been that Buffett was finally, finally abandoning his buy-and-hold strategy to make one quick score for the bucket list? Absolutely not.
If anything, Buffett sounds determined to hold PCP straight to his grave and beyond, if such a thing is possible — which would thus make it the ultimate example of buy-and-hold play. To quote Buffett: “We’re going to be in this business for 100 years, so it doesn’t really make any difference what oil and gas does in the next year.”
By the year 2116 — assuming Buffett doesn’t make it to age 186 or get reincarnated — it’s possible the disciples of his buy-and-hold strategy will be known in memoriam as “Buffettists.” His influence on and adherence to the tactic is that unwavering. Buy-and-hold is as far away from quick-hit riches and market timing as a mogul can get.
“Warren Buffett has often been quoted as saying that his favorite holding period is forever,” says David B. Smith, chief investment officer at Rockland Trust in Hanover, Massachusetts. “To understand why he favors a long-term buy-and-hold strategy, one need only look at what Buffett has publicly said and what he has invested in over his storied career.”
That includes not just Dairy Queen and Precision Castparts, but storied legacy companies such as Coca-Cola Co. (KO), General Motors Co. (GM), Wells Fargo & Co. (WFC) and International Business Machines Corp. (IBM) as well.
So how exactly does buy-and-hold work in Warren’s World? It’s too simplistic to take the approach of buying any stock at a premium and keeping it for a decade longer; that discounts the notion of competent company management and a proven track record.
Nor does it take into effect the magic of compound interest, compounded further still by healthy dividends.
The nuances work like this, Smith says: “Buffett has stated that ‘time is the friend of the wonderful company and the enemy of the mediocre.’ What he means by this is that outstanding businesses compound your wealth year after year, while low-quality businesses that are exceptionally cheap can only grow your wealth once, which is when you sell them — presumably or perhaps hopefully at a profit.”
But suppose you get into a stock at a time when the price dives into a hole and stays there for a year or more? As Buffett himself might say when driving his 2015 Cadillac XTS to work (which replaced his 2006 Caddy, by the way), “Hold on.”
[See: 8 Cheap ETFs That You Won’t Regret.]
“For a diversified equity portfolio of U.S. stocks, 10 to 15 years is long enough to overcome any bad timing in terms of entry points,” says Michael Pagano, professor of finance at Villanova University in the greater Philadelphia area. “Any shorter than that and you run the risk that you buy at a peak and then have to sell out at a trough.”
If nothing else, more proof that Buffett loves buy-and-hold stocks can be found as close as a fat bank account — though then again, Buffett is known to loathe cash the way some teenagers back off from broccoli. So it’s a good thing Buffett and his prodigious portfolio have harvested green of another sort.
Berkshire Hathaway Class A shares have soared, soared, soared to more than $225,000 — beating the median home value in Buffett’s native Omaha, by a good $85,000. (With the change, you could snag a second home in Scranton, Pennsylvania.)
And comparing BRK.A price markers in 10-year intervals, Buffett’s buy-and-hold strategy is the stuff legends and fortunes are made of. In September 1996, Berkshire Hathaway stock was worth just above $32,000. In September 1986, it went for $2,625. So if you were lucky enough to land one share — just one — of BRK.A 30 years ago, you’d have made 86 times your original investment. Twenty years ago isn’t looking too shabby either, with a return of seven times your money.
Yet Buffett’s love affair with buy-and-hold doesn’t represent a skeleton key to riches: If it did, there would be no trail of decimated portfolios on the path away from the trading pit.
For starters, stocks — no matter how long you keep them — will always be riskier than bonds. And adherence to the philosophy, while ignoring company implosion via corruption (think Enron and Tyco), adds up to “broken hold,” so to speak.
Ultimately, the fulcrum on which successful buy-and-hold balances, at least the way Warren Buffett practices it, rests on the most basic and bedrock of principles: Invest in what you know.
Smith sums it up thus: “Buffett believes you should invest within your circle of competence and when you study Berkshire’s performance you find that nearly all of his greatest investments have come from one of four different industries.” These include media, consumer staples, financials and insurance.
[Read: Stick to Your Investment Philosophy.]
But if you want to add a fifth, feel free to mark down ice cream. It’s impossible to count how many Dilly Bars the Oracle wolfed down before snagging the ultimate treat — and nearly as difficult to measure much in profits he’s slurped up since.
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Why Warren Buffett Loves Buy-and-Hold Stocks originally appeared on usnews.com
