The richest people in the world started successful companies or bought into them. And these people retain ownership over the years. You may be too late to found Microsoft, Walmart, Amazon.com, or Berkshire Hathaway but you can follow the examples of these folks. Buy and hold value investing, when you choose the right investments, results in profits that continue for years and years. Why does this approach work? And, how to do you choose an investment to buy and hold?
How Do You Choose an Investment to Buy and Hold: Why Does This Work?
We like the Warren Buffett quote that the first rule of investing is not to lose money and the second rule is to not forget the first rule. We have written recently about the importance of not losing money when investing and how you have to increase your rate of return on an investment to recoup losses and get back on track after a year or two of losses. Likewise we wrote about how to invest without losing any money by focusing on bonds held to maturity. Although you can make a lot of money in a bull market, too many investors stay with volatile investments too long because they are unable to profitably time an investment cycle. Why a successful buy and hold investment works is because you do not waste money on repeatedly buying and selling and incurring excessive overhead that eats away at your gains. And, a solid long term investment provides appreciation as well as dividends. The long term in this case is ten years or more, which is enough time to average out the gains and losses of an investment cycle.
How Do You Choose an Investment to Buy and Hold: Choosing Investments
A recent article by The Motley Fool highlights three cheap big pharma dividend stocks that they suggest you can buy and hold for many years.
One of the greatest enemies of investors is trading too frequently. Jumping in and out of stocks too often dramatically reduces returns over the long run. That’s why it pays to find stocks that you can buy and hold onto for years.
Stocks that meet three criteria often make the best long-term picks. First, their valuations should be attractive. Stock valuations tend to revert to their means over time. Second, they should pay great dividends. Don’t underestimate how important reinvested dividends are to total returns. Third, the stocks should have solid long-term growth prospects.
Their three suggestions are AbbVie, Gilead Sciences, and Pfizer. In each case, the main reason to choose these companies is new medications in the pipeline and strong research and development which will provide revenue far into the future.
Long term revenue is the key to choosing an investment to buy and hold. This is the basis of using intrinsic value as a guide to investing. The key to using this approach is to stick with companies whose business models you understand (and are easy to understand) and which will likely work to provide profits into the long term future. But, buy and hold does not mean buy and ignore. The classic example of a business plan that technology changes made obsolete is Eastman Kodak. These folks invented the personal camera and film and were the world leader for most of the 20th century. Then digital came along, and their business plan did not work. When you choose an investment to buy and hold you still need to pay attention.