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When to
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Stock Selling Strategies The selling strategy of what is commonly called the buy and hold approach to investing can be expressed in one word - don't! And the arguments in its favour are strong ones. For one, it has a solid record of success. Such famous names as Warren Buffett and John Templeton made their fortunes with it. Or consider the remarkable case of Anne Scheiber. She represents, not only the superb returns that can be enjoyed from a skillful buy and hold strategy, but also the pluck to jump back in the game after losing everything. In 1933 and 1934, at the height of the depression, 38 year old Anne invested most of her life savings in the stock market. She let her broker brother make the picks and they were good ones. Unfortunately, his company went bankrupt and she lost everything. But Anne did not give up.
Miss Scheiber left virtually the entire fortune to New York's Yeshiva University. By the time the estate was settled in December of 1995, it had grown to $22 million. You'll find links to her story and to investing tips based on her approach after this article. The Buy and Hold approach to investing focuses on the buying, not the selling. The aim is to buy stock in companies that are solid and growing with long term potential. It focuses on the underlying value of the stock. The approach is often considered synonymous with value investing. It ignores the stock market, the general economic climate, and prevailing sentiment. Warren Buffett, considered by many to be the greatest investor of all time, has said that he pays no attention to the stock market, and in fact, would not mind if the market shut down for a few years. He buys stock in a company as if he was buying the entire company. It's the value of the company that interests him, not the value assigned to it by the market. He wants companies that generate consistently growing profits. Value investors tend to focus on buying undervalued stocks. And value investing is not completely averse to selling a stock, though the preference is to hold. As the Templeton Fund puts at their website, "Templeton buys stocks with the intent to hold them until they reach their "fair" value-- typically five years." Buy and hold investors do sell when the fundamentals of a company change or when a stock becomes so grossly over-valued by the market that it would be foolish not to take profits. But in general, short term market fluctuations are ignored. Downside to Buy and Hold Of course, while buy and hold investing has definite advantages, there is a downside. There have been major bear markets in the past and such markets tend to drag down all stocks, even those of good companies. If such risks can be minimized, wouldn't it be worth it? The question is, can it? In the June 19, 2000 issue of the Hulbert Financial Digest, Mark Hulbert points out that there are newsletters who have been able to minimize investor losses during severe market corrections. Five in particular stand out. These five market timers were able to keep their readers' losses to one or two percent during each of the last five major market corrections since August 1987 (while the Wilshire 5000 averaged a 15% loss and the NASDAQ Composite lost 20%). But...and here's the rub - those five newsletters failed to capture the tremendous gains made during the up cycles. Their average returns for the entire period from August 31, 1987 to May 31, 2000 ranged from 2.3% to 7.2% while the Wilshire averaged 14.3% and the NASDAQ 17.1%. Safety comes at a serious price! In fact, Buy and Holders disparage the notion of market timing. It is folly, they say. And a pamphlet from the Templeton Fund in 1997 demonstrates that better than anything. Follow the link below for a summary. That said, there is another side to the argument. Click the link below for a contrary view. The Folly of Not Market Timing Summary of Advantages and
Disadvantages
Other Links of Interest Death and the Maven - Time Magazine's account of Anne Scheiber's life and legacy. The McFarlin House: For this North Florida town, Coke was it! - Another well known example of Buy and Hold investing is the story of the Quincy, Florida Coca Cola millionaires. Around 1919, local banker Mark (Pat) Munroe urged clients to invest in the fledgling Coca Cola company. Many did. And those that hung on to their shares became multi-millionaires. At one time Quincy had the highest per capita net worth of any city in the U.S. as a result. This article is at a travel website. Gadsden County: History and Heritage - Another account of the Quincy Coke millionaires |
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