Monday, November 24, 2014

A Case for Buy and Hold – 11/22/14

Buy and Hold works well when the market has been ripping forward as it has over the last 5 years. While we debate how long this can last, it beats all the pundits predictions of pullbacks and keeps going forward while frustrating many technical analysis oriented frequent traders.
When I think of the huge drop commodities (such as DBC) have seen, I tell myself you can’t rely on buy and hold. But this blog will be about how can you do a buy and hold and not all the afflictions against it.

Many months back, listening to a visiting speaker at AAII (American Association of Individual investors) I heard of a superb method to invest if you had lots of money.
The speaker (I cannot remember his name or face) told us about this rich widow who lives in Florida. He manages her investments by putting her money in high quality dividend paying stocks that will appreciate in value over time. She just lives off the dividend. His logic was that by buying a high quality stock such as these for $40, she would get 3% dividend annually ($1.20 for each stock held). In a few years, this stock could hit $60 and her dividend would be 3% of $60 ($1.80 for each stock held) – an increase of 50% in dividend or a net 4.5% dividend on her original investment. That would more than keep up with the pace of inflation. Sounds too good to be true? Not at all… he was right on the money. And how do I know? Because I created a list of his stock selections two years back and put them in a folder and I am amazed at the appreciation her portfolio has seen in capital value as well as dividend growth!

Below is a list of the el primo stocks he gave us that day in her portfolio. All I had to do was stick my money into those, forget about the ups and downs any individual stock went through and kept the dividends… alright with my technical analysis, I could even just have stayed on stocks with an up signal. And based on a long term view, that could have been just based on a weekly chart and not the daily chart shown below! Therefore there is a case to be made for Buy and Hold… as long as I do that with top quality, high free cash flow, diverse set of stocks such as listed below….
ABT, COP, INTC, JNJ, KO, MDT, MMM, PEP, PFE, PG, SYK, SYY, UTX, WMT, XOM.

For now, I will trade these in the direction of the long signals as they come up, although some look pretty overbought now… take a look at WMT, KO etc…I am in KO and PEP and sold JNJ, ABT, WMT recently.







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