Buy & Hold Still Works

You often hear that buy and hold no longer works but from my experience the good news is that it still works. Yes the markets are more volatile and yes speculators still make money but buy and hold still delivers strong returns to the diligent and patient investor.

There are off course differences between buy and hold and buy and forget. For buy and hold to work, you must buy good companies that grow at a reasonable pace and are priced fairly. Thereafter, you must review each company at least once a year to ensure it is still fundamentally strong despite any hiccups you might have observed. I review my holdings every quarter once the quarterly results are released. Any company that shows sign of weakness is put on a watch list where I keep an eye on it. I sell once I believe the company has lost its way permanently. Therefore, you cannot afford to forget your investments.

To illustrate why buy and hold still works, let’s examine Nestle Nigeria. I first bought it in 1998 at about N18. Today it sells at N1,051 despite several splits and pays a dividend of N20 per share. The dividend I receive today after the splits is about N60 per each original share, which is thrice the cost of the original share. Even if you discount it at the growth rate of the economy, the dividend is about N16 delivering a stunning yield of 89% and this just for a 15 year holding period.

It is not just Nestle but others like GTB and FBN, well known banks, have also delivered excellent results in the last 15 years despite the recent collapse of the stock market.

There are also companies that have been laggards or outright investment disasters. An example, which I bought in 1996, was Ekocorp, a health care management company. It never took off and although I did not loose money it was a poor investment and illiquid. Fortunately, I was able to sell in 2007 when the market as a whole took off.

My strategy in a nutshell is thus:

1. Research and find strong companies selling at reasonable valuations. The price needs not be a bargain as such are rare but it must be fair.
2. Buy these companies
3. Review quarterly to decide whether to hold, watch or sell.
4. Continue to buy more of the company as long as the fundamentals are strong.
5. Hold no more than 12 companies at a time to enable me keep my review manageable.

While there is money to be made in speculating, I prefer the above approach as it requires less time, involves fewer decisions, is less stressful and has delivered returns I can live with comfortably. That is all that matters.

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