Fool's Eye View

[ November 27, 2000 ]

Long Term -- For Some

By Stephen Bland (TMFPyad)

My colleague Nigel (TMFNigel) wrote last week in favour of the long term buy and hold approach to investing in shares. Somewhat surprisingly, perhaps, this generated a lengthy exchange of messages on the Investment Strategies discussion board, to which I contributed a small part. I say "surprisingly" because the long term philosophy is hardly controversial. In fact it is the quintessential Foolish style of investing. I would like here to expand a little more on Nigel's comments and give my slant on this approach.

It cannot have escaped the notice of readers, and many have commented on it, that there is a bit of a paradox about the Fool in that whilst we advocate long term (or LT) investing, at the same time we have message boards dedicated to all sorts of styles, many of which of which are the direct antithesis of LT. Examples are the Technical Analysis board, the Value board and of course the most anti-LT of the lot, the Day Trading board.

The reason we do this is that we prefer to be a broad church for investors of all styles to discuss their approaches. The Fool would be a pretty dull place if we limited the whole thing to LT only.

Given our stance here at the Fool, it is perhaps extremely odd that we do not have a long-term investors message board. I know we have the Qualiport board, but it is dedicated primarily to that official Fool portfolio, rather than to a discussion amongst readers as to the selection criteria and actual shares that they themselves might prefer to hold personally for LT purposes.

My personal view is that any strategy which works for an investor is fine. Yes, even day trading. I am one of the few here who do not condemn this method out of hand, because I know that some people win at it, although I do believe that it also has a high failure rate. The problem with any strategy comes when investors who are not genetically predisposed to it try their hand and lose. Perhaps because they see those who are good at it making money, and try to emulate this. Yet without that special ingredient with which good strategists are perhaps born, it will be very difficult.

I see this on the Value board sometimes. A share is suggested, those who are not real players go in because they are simply picking up tips, then after a short time some may become impatient and complain that it has not done the business. They fail to realise that value is often a hard slog that can take a year and more, that requires patience and belief in the share, often in the face of opposition. In a word, commitment. If you cannot live with that, cannot handle falls and expect it to come good in a few weeks, forget it, you will never make a good value player. You have also to expect that sometimes it will go wrong.

Another paradox about LT investing is that it may well be best suited to those who are actively disinterested in the market and thus are not tempted to meddle with the portfolio on every item of press news or whatever. I am in the privileged position of seeing a quite a number of private investors, through my accountancy practice, and from this I am in no doubt that LT is a great strategy. This may surprise some people given my personal short-term value style, but what I am saying is that for a number of people who possess the right financial personality LT works and works well.

I can think of two people who have held share portfolios for well over twenty years and have never touched them. The shares consist of a spread of typical blue chips with no sector concentration. The only changes to the portfolios have arisen from events outside their control such as mergers and demergers, and there have been quite a few of those. Both these ladies inherited their shares and, apart from gender, have the common characteristic that they are totally disinterested in shares. They have no idea what they are worth, the yield, nothing. As a result the growth has been magnificent, and the yield is now massive as a percentage of the original inherited capital value. And all this through doing absolutely nothing!

Of course they were extremely lucky to have inherited in the first place and never had to make a decision on which shares to buy. Rich aunts do have their uses. But where their "skill" came in was in deciding to do nothing. These ladies' financial personalities, which I would describe generously as totally non-existent, actually aided their subsequent success. They stayed within their circle of competence. In their case a circle with zero diameter. Had they, upon inheriting, started reading the financial press or bulletin boards when they came into existence, it is possible that their fine performance would have been messed up by meddling. You can't know of course, but given that they lack any financial instincts whatsoever, believing that a stock is some kind of soup ingredient, that would have been the likely outcome.

The moral of this, I guess, is that it is difficult for one investor to advise another upon a strategy. The person must first analyse their financial personality then find the style which matches it. Beginners will often fail to do this and may end up losing money in fad stocks like the recent tech boom and collapse, because they lack trader instincts. They see what appears to be easy money, but lack the ability to trade it.

So in conclusion I am going to differ from Nige a little. I am not going to claim that LT is the only or best way to go. I don't follow it myself. But where I support him is that for those people who, crucially, possess the personality for it, that is the ability to do nothing and not be swayed over extremely long periods, it is actually a great strategy.

Critics of long term investing point often to Marks & Spencer (LSE: MKS) as an example of how the approach can go wrong. But LT requires a portfolio of shares, I would say ten to fifteen is adequate. In the long run, I am talking here of say twenty years and more, the odd M&S should be more than compensated by the winners, although there can be no guarantees. All strategies will have varying degrees of success, or the odd loser, so the chance of an M&S is the risk you take with LT. If you don't want risks then don't buy shares at all. But the M&S argument is nowhere near sufficiently strong to negate the concept of LT.

The hard bit, of course, is in ascertaining which shares to hold for the long term. For the sake of space, that must be the subject of another article in itself but for my money, the kind of yield portfolio that I laid out here a few weeks ago would do just as well as a long term approach. You simply reinvest the dividends instead of drawing them as income.

Where Next?
• Nigel Roberts' original article: Long Term Buy & Hold -- The Rules

• Retirement Pays Dividends: Part 1 | Part 2