How long to hold a buy-and-hold stock
You can’t hold stocks forever, but buy-and-hold is still the best way to go, says this Canadian analyst, who has three buys to hang on to.
Mr. Warren Buffett says that the ideal time to hold a stock is forever.
Nice work if you can get it.
But not many investors can justify holding a stock indefinitely, not even the pros.
Indeed, a number of commentators have pushed the pendulum to the other extreme. They claim the “buy-and-hold” style is dead.
Mr. David Baskin, who has been buying and holding stocks for many years as president of his own wealth management group, wants to set the record straight.
No, you don’t get to hold stocks forever, he tells the readers of The MoneyLetter. But this is still the most profitable way to build a portfolio.
He explains what buy-and-hold really means, gives some examples from his own experience, and identifies three stocks he thinks are perfect candidates for that strategy right now.
Don’t buy and forget
Even a seasoned buy-and-hold investor will not count on holding a stock for more than five or 10 years. “Buy and hold does not mean buy and forget,” Mr. Baskin states.
What it does mean is that “each stock purchase is an investment rather than a speculation.” You intend to hold those shares for a long time, unless something important changes.
There are two keys to success. You must have a clear understanding why you bought it in the first place, and you must monitor it regularly.
Here’s how Mr. Baskin’s group makes that first important decision.
You begin by looking at the economy in general. Who wins and who loses. “If we understand that the U.S. housing industry is about to go into the tank,” the analyst reasons, “we will not rush into lumber companies.”
But if the Chinese are about to start stockpiling fertilizer, potash companies step to the front of the line.
Really good ideas
Once you’ve decided that a sector is on the upswing, you seek out the best companies in that sector. You look for good management, a history of making money and a strong presence in the industry.
“There is no substitute for this kind of basic research,” Mr. Baskin emphasizes. “If you don’t do it, you might as well throw darts.”
He and his colleagues then go one step further. They look at basic fundamental analysis — the quality of the earnings, the quality of the balance sheet and the quality of the assets. And one more thing: will the dividend hold up?
Then you compare all the possible buys, and pick the best one. After all this effort, you certainly want to keep the shares for a while.
“It is a lot of work finding worthwhile shares,” says this analyst. “I often say that really good ideas are the rarest commodity in our business.”
How long do you hold those good ideas? He illustrates with two examples — one that was eventually sold, and one that’s still in hand.
No longer valid
The economy changes and companies change. “Being a buy-and-hold investor does not mean ignoring these changes,” says Mr. Baskin. EnCana Corp. (TSX-ECA) is a case in point.
His group held shares in EnCana from the time it went public on the breakup of the old Canadian Pacific conglomerate. “The economics of natural gas seemed fairly straightforward,” says the analyst.
Demand would keep growing, while supply dwindled as more wells became less productive.
But the economics of the industry changed. New drilling and rock fracturing techniques vastly increased supplies of natural gas. Liquefied natural gas came on the scene. Gas inventories kept piling up.
“While EnCana remains a well run, well-valued company, it is simply not as attractive to us as it once was,” concludes Mr. Baskin. “When we thought about the reasons why we bought the company, we realized they were no longer valid. So we sold.”
The Quebec discount
Some things rarely change. The six major banks in Canada are almost guaranteed to make money under the rules of our banking system, Mr. Baskin observes. One his group has owned for a long time is National Bank of Canada (TSX-NA), due mainly to its “niche” position in Quebec.
While this limits growth potential, it also limits the potential for nasty mistakes, he says. With the addition of an investment banking arm and wealth management network, it stacks up nicely against the Big Five.
But it was the stock’s attractive valuation that sold Mr. Baskin and his colleagues. Its shares have intermittently suffered from the so-called “Quebec discount,” the fear that separation would undercut its value. So when the other banks trade at 13 times earnings, National trades at 11. When they pay dividends at 3.5 per cent, it pays at 4 per cent.
“We have owned National for a long time, and still do,” says the analyst. “During the 2008 crash, the shares fell as did all others, but we did not sell them. There was no reason to.”
Indeed, this demonstrates one of the great advantages of buy-and-hold investing, Mr. Baskin says. “How many investors who sold in a panic last November or in March of this year got back into the market in time to re-coup two-thirds of their losses in the stunning rally which followed?”
Buy-and-hold investors do not regularly cash their winners and pay 25 per cent of their profits in capital gains tax. They collect their dividends and let the capital appreciate over time. And they pay less in broker’s fees.
Three to hold
So if you’re ready to buy and hang on, Mr. Baskin tells readers of The MoneyLetter, here are three stocks to consider.
Fortis Inc. (TSX-FTS) is the largest public gas and electricity distributor in the country. It has raised its dividend for 37 straight years.
SNC Lavalin Group (TSX-SNC), the international engineering and construction giant, has projects in 100 countries and a $10 billion backlog.
Empire Company Ltd. (TSX-EMP.A) owns Sobeys stores, Empire movie theatres and Crombie REIT. The dividend has doubled in six years.
You don’t have to love a stock forever, this analyst reminds us. But if you’ve chosen it carefully in the first place, it should be the beginning of a beautiful friendship.
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