One of the first major “mindset tips” new investors either directly receive from someone more experienced or stumble upon by themselves is to “buy and hold” stocks. The reasoning seems to make sense, as a longer holding period should level out short term fluctuations and enable a positive investing outcome. However, this concept does not take into account a key component, misleading many investors, often causing avoidable disappointments.
Summary and key takeaways from today’s Weekly
– With this Weekly, I wanted to show you something that is actually pretty logical, but it’s also against slogans like “buy and hold”.
– Factually, as an investor you should be open-minded and observe your environment. Also, take care of your investments, watching out for big shifts in trends.
– There are several examples of formerly market-leading companies or strong brands that went into oblivion, because they did not make it to the future.
Who hasn’t heard of the famous “buy and hold” strategy that is said to make investing in stocks an effortless success? But what if I told you that this concept is highly dangerous, when blindly applied? What at first glance seems like a bullet-proof walk in the park kind of concept, unfortunately has a big problem attached to it.
The key ingredient I am missing is the dynamic evolution the world, the economy, the companies and also the people are experiencing – just everything changes throughout the time!
Or are you still using horse-drawn carriages to drive somewhere? But surely petroleum lamps to illuminate your room? Are you faxing messages or documents? Mow your lawn with a scythe? Listen to your favorite music using a walkman and a self-recorded cassette? Have a typewriter at home to write a formal letter? Use 3.5 MB floppy discs to save a few documents or start a computer game with MS DOS?
Many younger people today do not even know such things or habits ever existed!
With the exception of the first two, there was a time I personally got to know these things. But their time has passed.
Although these are radical examples, I think, you see what I mean.
What might sound shocking or even like nonsense from my side, will prove to be true in this Weekly. I do not want to just question a widespread narrative for the purpose of being a rebel, but to show you that it is highly dangerous to just pick headlines or phrases in isolation.
No matter the source and no matter how logic or tempting it might sound.
All the things listed above were once widespread.
The walkman, first introduced in 1979 by Sony (ISIN: JP3435000009, Ticker: 6758), was a success! But would you buy Sony shares today based on the walkman? Sony is an example of a diversified conglomerate that developed new, contemporary products, thus not relying on just one product and making the transition to new gadgets.
However, there are also not just few examples of formerly successful, even market-leading enterprises, but also big, prestigious brands that fell into irrelevance. Buying and holding would have resulted in at the minimum pretty disappointing returns!
The problem is, such “valuable and timeless tips” are often either shortened or ripped entirely out of context.
So, this will again be a mindset article. Timeless, because human nature never changes. And valuable, because one should learn from history in order not to make preventable mistakes that someone else already did.
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The world is changing – the dynamic mindset
As a stock investor, meaning investing directly in individual positions or fractions of real companies and becoming a co-owner, you should have the mindest of a dynamic investor. This does not mean that it is necessary to watch several times a day how shares jump back and forth on the stock exchange.
This misses the point.
It is also not about trying to time the market – something that in 99% of attempts fails anyhow – or to predict a coming (or not) market crash. In the case of the latter, you are risking sitting on the sidelines while watching markets going up.
This is also what Peter Lynch meant with his famous quote:
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.Peter Lynch (see here)
But it is mandatory to be aware of major shifts taking place. You should know what you own and even more importantly why you do so.
Can you explain it in plain language?
Neither the world as a whole, nor society in particular are static.
While you can find recommendations from many investors like André Kostolany’s “buy stocks and then take sleeping pills” (known in Germany), it should be rather taken with a bit of a grain of salt and not literally.
If you break it down to the level of products and consumption patterns – barely anything stays the same for decades or even centuries. And this has direct implications on companies, as new ones come and old ones go. Everything has a cycle to it. Newcomers displace dinosaurs which turn into oblivion.
Likewise, a bad management can ruin an otherwise sound company.
Hence, developments in your investment environment must be observed.
I like to distinguish between on-screen and off-screen research that can be done.
The former is the typical fundamental analysis, reading quarterly results and so on. You can either do it in full-time or just occasionally by at least screening through the major earnings releases. But it should be more than just reading the headlines. Read what management says, how the business outlook develops and check the financials.
Compare what is said to what is done. Are words and numbers fitting together? When everything’s fine, why is cash flow shrinking?
For example, if you’re a dividend investor, you want to make sure that your company generates enough free cash flow to be able to pay its dividend (and not out of substance). How have debt metrics like net debt or interest coverage changed? Is revenue growing and how fast? Have margins changed?
The latter (off-screen analysis) is a rather softer and more open approach where you keep your eyes and ears open in your everyday life, observing big shifts in habits, tastes or consumption patterns.
What electronic devices are in use? Is an iPod easier to handle and more comfortably to put in your pocket than a walk- or disc-man? Has the BlackBerry been displaced by an iPhone? Is a clothing brand that was “hip” a decade ago still present? Are people still lining up to get a seat in a booming restaurant? Has the product quality deteriorated, because a company is trying to push down costs, no matter what?
Of course, these are only a few questions you can ask yourself.
Not everyone will recognize all shifts in trends. This is neither possible, nor necessary. Just stay in your comfort zone or “circle of competence”. If you’re working in a certain area, you could start to monitor your niche more actively. You will certainly notice big changes when they come.
Who says that a physicist has to be an expert in banking or an electronics maker know how commodity markets work?
Another “important tip” to put a big question mark behind is to only buy stocks of companies with well-known brands and / or products, because then “nothing can go wrong”.
This again is as true as dangerous.
Who is still holding shares of Nokia, Polaroid, Commodore, Atari, Kodak, Minolta, Sears, Tupperware, FitBit, PanAm, Netscape, Blockbuster, Toys R Us or (for my German readers) AirBerlin, Praktiker, Dresdner Bank, Karstadt, Gerry Weber?
What reads like a pot of garbage, in fact contains formerly either successful companies or at the very least broadly known brands (even if the underlying business was struggling its way into bankruptcy and non-existence).
I hope that I was able to stress my point.
There always comes a time when a story is finished. While some can take longer, others are finished quicker. The good thing is that it usually takes time – often enough even years – for new big trends to finally be widespread and on the other hand for old products or habits to disappear.
Nokia was the market leader with cell phones. Between 1999 and 2010, it had market shares of up to 40%, even! That is roughly double of what the iPhone is having today! But you see, the iPhone only came in 2007, so there was enough time to see a changing trend (unfortunately, I wasn’t investing back then, but switched from a Nokia cell phone to a Samsung…).
Of course, stock prices will start to fall earlier and not wait several years.
But it is also unlikely – hopefully – that you bought every position exactly at the top. While it is frustrating to see unrealized gains shrinking after a good run, it is possible and realistic to exit positions after the top at a profit.
Watch the trends and also listen to your gut feeling!
More contemporary examples – as opposed to the ones above – are certainly companies like 3M (ISIN: US88579Y1010, Ticker: MMM), Altria (ISIN: US02209S1033, Ticker: MO) or Intel (ISIN: US4581401001, Ticker: INTC).
All of them rather have their best days behind them, however due to different reasons.
No matter, how passionately they are advertised and defended as still being great must-own companies with reliable dividends, because this was the case in the past.
As a serious investor, you should not live in the past. It is okay to be nostalgic, but not when it comes to investing.
3M was – from my view – destroyed by its management, spending big on acquisitions, buying back stocks at the top at a P/E ratio of 30x (3M is a highly cyclical company!) and stretching the balance sheet with too much debt.
Altria (respectively prior as Philip Morris) has been a slowly dying business for half a century already, at least volume-wise. Sales, cash flows and the dividend were increased through price hikes. But now it seams as if the point is crossed, where price increases eat too much into volume. Despite high inflation where consumer companies are able to bump up sales, Altria could not, recently!
Intel also made several mistakes over the last ca. 20 years. First, they missed the entire mobile revolution, smiling over chips for smartphones. Then, three years ago, they even got kicked out by Apple (ISIN: US4581401001, Ticker: AAPL) as a CPU supplier for most Macs.
First missing on new trends and then even losing its technology leadership in the legacy business has led Intel to downgrading itself into a supplier with heavily investing in its foundry business (making chips for other companies; what they present as a big opportunity).
To close this chapter, a question:
Of the companies, being constituents at the start of the Dow Jones index in 1896, how many are still left today (in the index)?
If you are generous, then it is only one – Chevron (ISIN: US1667641005, Ticker: CVX), being one of the successors of Standard Oil (see here).
All others either crumbled into dust, were broken up, merged or in the cases of General Electric (ISIN: US3696043013, Ticker: GE), AT&T (ISIN: US00206R1023, Ticker: T) or ExxonMobil (ISIN: US30231G1022, Ticker: XOM) are still alive, but not in the index anymore.
You see, time flies and the world changes.
It is dynamic. So should your mindset be.
Or in the words of Greek philosopher Heraclitus: change is the only constant in life.
With this Weekly, I wanted to show you something that is actually pretty logical, but it’s also against slogans like “buy and hold”.
Factually, as an investor you should be open-minded and observe your environment. Also, take care of your investments, watching out for big shifts in trends.
There are several examples of formerly market-leading companies or strong brands that went into oblivion, because they did not make it to the future.
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