LONG LIVE BUY AND HOLD!
Warren Buffett has said that his favourite holding period for a stock is forever. That might be taking buy and hold investing to an extreme, but we share the general sentiment. We recently looked at our record as buy and hold investors, and discovered some interesting facts. When we examined the 20 largest positions we held in our clients’ portfolios five years ago, in June 2009, we found that 2 had been taken over (Inmet and Shoppers DrugMart) and that of the remaining 18, we still owned 9, and all 9 are still in our top 20 holdings. This is a remarkably low turnover rate, equal to about 10% per year.
OUR TOP 20 POSITIONS OVER THE PAST SIX YEARS
Now, of course, there would be little virtue to an investment policy of buy and hold if it did not make money. We are all familiar with the adage that good investors do not fall in love with their stocks. A portfolio with little turnover might not be an indication of good investing, but simply a sign that emotion was overwhelming reason. To check this, we calculated the total return for the 11 long term survivors (all owned at least six years) in our current top 20 list, compared to both the TSX and the S&P 500 index over the period. Here is what we found:
The Compound Total Return is the change in value of the security plus interest or dividends, per year, compounded. In other words, a stock which went up 3% per year every year, and paid a dividend of 2% of the original cost every year, would have a compound total return of 5%. As you can see, all 11 securities had positive returns over the period. We did not make the mistake of holding on to our losers. Annual Alpha is the amount by which the return on the security exceeded the return on the TSX 300 over the same period. Each security did better than the overall TSX in the six year period, some of them remarkably better. Note, by the way, that we are not measuring from the market trough in 2009, but from the days before the market crash, in 2008.
Why does buy and hold work? In our view, the hardest job for any investor is finding a high quality company available at a good price. When we do succeed, through diligence and research, in finding one, we should be reluctant to let it go unless and until we can find something better. In the case of the 10 stocks included above, all are high quality dividend paying companies with enviable records of growth in earnings. We don’t hold them because we love them; we hold them because they are great investments.
Selling great investments means paying capital gains taxes, and more important, means finding a replacement. No one likes paying taxes, and sometimes suitable alternatives are hard or impossible to find. So buy, hold and make money.
Disclosure: Clients of Baskin Financial own stock in companies mentioned in this post.