The magic of holding

By sticking with Disney through the '70s doldrums, Warren Buffett came out a winner

David Berman
Globe Investor Magazine Online, February 19, 2009



Equity investing doesn't have to be complex. Buy some good stocks and hold on to them through good times and bad. Every so often, however, something comes along to challenge this strategy. Last year, the challenge came from the fact that major stock market indexes plunged about 40%, sending U.S. stocks back to where they were about a decade ago. Now, buy-andhold investors are looking like suckers. Is the strategy on the verge of dying?

It's certainly not the first time that longterm investing has worn on investors' patience. The current decade-long malaise in stocks is relatively short compared to the doldrums of 1966 to 1982. Back then, the market was just coming off the 17-year bull market that had begun with the postwar boom in 1949, during which the Dow Jones industrial average rose about 450%. That boom led to unsustainable valuations on stocks, much like the situation that confronted equity markets at the end of the 1990s, and took years to unwind. The Dow Jones industrial average started 1966 at 970; 16 years later, it was at the same level. Yes, you would have made money from dividends, but not enough to make stocks the winner over government bonds.

However, there were many ups and downs over this period-between 1974 and 1976, the Dow surged 75%, only to tumble over the next year and a half-which is why short-term investors believe that it's best to be nimble: Stay invested on the upswings and cash out at the top.

Trouble is, this isn't easy to do. Brad Barber and Terrance Odean, professors at the University of California, looked at the impact of trading in the early- to mid-1990s and found that frequent traders lagged both the market and those investors who traded less frequently, and by a substantial margin.

Need another reason to stick with the buy-and-hold strategy? Warren Buffett, one of the greatest living investors, is a vocal supporter of this approach. Between 1966 and 1982, when the Dow went nowhere, Buffett never had a down year and his average annual performance was just shy of 22%. How did he do it? He owned good stocks, such as American Express and Walt Disney, and held on to them through good times and bad.