Buy, Hold, and Reinvest

Buy, hold, and reinvest: It’s ridiculously simple, not easy, but simple. Frankly, if you just buy and hold the biggest and best “franchise” names, the bluest of the blue chips if you will, and you never mess with them, it’s hard to screw up. You typically get in trouble when you start trading. Nervous energy is a great destroyer of wealth, said legendary investor Fayez “The Sphinx” Sarofim, a big buy and hold blue chip guy. I’m a firm believer in keeping things simple, and over the years, I’ve come to understand that true genius lies in simplicity. In the previous chapter we looked at Charlie Munger and Warren Buffet. Their company Berkshire Hathaway is a holding company that owns tons of dividend-paying stocks.  Berkshire buys and holds many of the names that have been outlined in this book-The Exxon’s, Coca-Cola’s, and Verizon’s of the world. Buffet and Munger keep it simple. When you look at Berkshire Hathaway, there are some years when their stock is lagging the market; the S&P500, let’s say. This is when the nervous types tend to get out and chase that shiny new investment “opportunity” they just heard about. Berkshire typically underperforms during years when the markets are hot, and things are going up. This is when Warren Buffett and Charlie Munger’s Berkshire Hathaway seems, well, boring. There’ll be times when the S&P500 is up 25%, and Berkshire Hathaway stock was only up 15%.

Naysayers might say, “Oh well, they’re losing their touch,” or “They’re too boring,” or “They're not keeping up with the market.” Suddenly, you have a recession or a couple of bear markets, and Berkshire Hathaway, flush with cash, starts doubling down. They’re now buying more shares of Coca-Cola while it’s down, and they now have a year when the S&P’s negative and they’re positive. All of a sudden, it’s “Wow, those guys were doing something right after all.” Warren Buffett says that when he buys a stock, he doesn’t care what the price is. He said, “If you’re going to invest in stocks, it shouldn’t bother you if the market is closed for five years.” If you couldn’t look at the price for five years, or you couldn’t sell it for five years, and you still want to own the stock, that’s a good benchmark to determine if it’s suitable for you to be investing in this company. He says when he looks at a company, he looks at the company’s fundamentals, and it’s totally irrelevant what the general market is doing or what the headlines say.

We all want sustainability. Buffet and Munger want to know what the earnings are and how well the company is being run. Do they have a moat around their business, and is it a real franchise? He wants to understand the management, specifically the people running the company, what their ethics are, and how they treat people. He wants to understand debt ratios. If they pay a dividend, is it sustainable, how long have they paid it and do they have a history of increasing the dividend? He wants to look at all the numbers and understand the business for the business and remove any emotions. He doesn’t care about the price of the stock or even the name of the company. If the fundamentals are strong and he determines that this is a well-run business that he wants to be an owner in, and if he can buy that stock for a reasonable price, then he’ll pull the trigger. That’s how they determine if they should invest in a stock, but once they do, they hardly ever sell. It’s like baseball but with not balls or strikes. As an investor, you can look at pitches all day long and never swing, sometimes good pitches that maybe you should have taken a cut at, but once you see the pitch you really like, then it’s time to take a swing. You may pass on 100 decent pitches before you decide to swing.

Buffett talks about not tracking the day-to-day fluctuations of stocks a lot, too. If you bought a farm or an apartment building, you would not care what the value was on a daily basis. If you owned agricultural land, you wouldn’t go on Zillow and look at the value of your farm every day. You’d probably look at it once in a blue moon if you needed to check on the property taxes or the general market for farmland agriculture that year, but you don’t really care what the price of your land is each day because you bought that farm for the crops it produces. It’s a long term income-producing asset. You bought it for the income it produces over the seasons, very similar to what we do with stocks.

You’re going to take crops from the farm, and you’re going to sell them, and that’s the income. Farmland is a passive form of income, the same as a dividend paid by a stock. It’s the same with commercial, industrial or even residential real estate. If you bought an apartment building, you bought that building for the passive income you will receive from the tenants. You’re typically not buying a building to flip it. Would you maybe sell it 30 years from now? Sure, depending on your financial goals at that time, but by that point, maybe you’ve made three or four times your money on the value of the building, plus the income along the way, and then you sell the building if you like, or pass it down to the next generation. It’s the same with owning stocks. The compound interest effect of dividend reinvestment with stocks works best when given enough time and if it’s done in the right way, not by checking the price of the stock every day.

Disclosure: One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Examples are for illustration purpose only and do not represent an actual investment. Dividends are not guaranteed and must be authorized by the company's board of directors.  Investments mentioned may not be suitable for all investors. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.