Devonyu
You’ve likely heard that a portfolio is like a bar of soap, the more you handle it, the smaller it gets. You’ve also likely heard of that famous study by Fidelity, which reportedly found that the accounts with the best returns were those of dead or inactive customers. There are other studies out there reporting the same.
Along the same lines, you may have also heard the advice Warren Buffett used to give in lectures about the 20-slot punch card. The idea was that if you could only buy and hold 20 stocks in your lifetime, you would think long and hard as to what you buy and at what valuations. Back in his business school lecturing days, this was among his top advice for improving your “ultimate financial welfare.”
Of course, all of us have a hard time heeding to this wisdom. We live in a culture where we are led to believe doing more is always better. But unlike say, practicing or exercising, doing less with your investments may lead to more.
Dead folks aside, I know of no one who exemplifies this better than Buyandhold 2012. The year in his username comes from when he signed up on Seeking Alpha, not how long he’s been investing, which is 52 years.
As his username suggests, he only buys and holds. Not sometimes. Not most of the time. All the time. Forced buyouts aside, he has literally never sold a single share of stock in his entire life.
Yes, there are dead folks who may match such a stint. Those who passed without heirs, or whose heirs were unaware of their stocks. There could be that unknown folder in grandma’s attic chock-full of paper stock certificates. When it comes to unclaimed electronically held accounts, most US states have laws on the books to cease those assets within a few years, so sadly that limits their time of idle.
Sure, you may have parents or grandparents who have owned the same mutual fund for five decades, but that doesn’t count. Remember on the other side, there is most likely an active management team buying and selling all the time. I’ve heard of no one living who has done what Buyandhold 2012 has done, for this length of time.
The beginning
The year was 1970. Between the money he had saved from his paper route and cutting lawns, as well as a little gifted cash from dad, he opened his brokerage account with $4,000. That year he bought Mobil, which is now Exxon Mobil (XOM), Abbott Labs (ABT), and Philip Morris (PM). Interestingly enough, these all eventually became Dividend Aristocrats or Kings, which probably explains his unwavering fondness for such over the years.
Throughout the 1970s, he invested a total of $50,250. By the end of that decade, his portfolio was worth $115,560.
Q: From my own experience, I felt like I didn’t truly know investing until after my first 10-15 years in the market. I think many people feel the same, as it takes a couple market cycles to humble you. Let’s talk about your first decade. What made you choose those 3 stocks that very first year?
A: My mother bought me a subscription to Standard & Poor’s. It came in the mail. I used to underline every stock rated either A-, A or A+. Then I would underline every stock with earnings that at least doubled every 5 years. Finally, I narrowed the list down to 3 stocks: Abbott Labs, Mobil, and Philip Morris. So those were the 3 stocks that I bought in 1970. I was 14 so it was held in a custodial account until I turned 18.
Q: Was this the same approach you took throughout that decade in your stock selection? Did it evolve?
A: At some point I stopped relying on Standard & Poor’s. Then I did research in Value Line, Morningstar, Kiplinger’s, Reuters, Investor’s Business Daily, Barron’s, the Wall Street Journal, Yahoo Finance. I also always watched Wall Street Week with Louis Rukeyser. That was the best business show on TV. I got some great recommendations from that show, many of which I did not act on.
Moving onto the 1980s, he ended that decade with a portfolio worth $2,471,700. This is despite the fact that he only added another $159,960. That, combined with the $50,250 he put in the prior decade, means 20 years later he had 11.75x the money he invested along the way. In actuality though, his performance was better. Although he doesn’t have the records to determine the exact breakdown, he estimates 66% of his “new” money these last 52 years came from reinvested dividends and cash from forced buyouts of stocks he held.
Q: During your first 20 years as an investor, which financial metrics were you focusing on most? Was it still companies which had doubled earnings every 5 years?
A: The name of the game for me was always earnings. And I could check the earnings very far back in Value Line. I liked to see consistently rising earnings. I didn’t know much about free cash flow, which Warren Buffett pays a lot of attention to, so I did not focus on it. Also important to me was a consistently rising dividend income stream.
Abbott Labs (ABT) is the poster boy for consistently rising earnings and consistently rising dividends. Did you know that Grace Groner invested $180 in Abbott Labs in 1934 because she was a secretary there? When she died 75 years later, her shares of Abbott Labs were worth 7 million dollars. I didn’t know Grace Groner, but there was someone in my family who invested the way she did and had a profound influence on me. My mother’s uncle.
He began buying stocks in 1930 and never sold any of them. I remember saying to my mother in 1970: “Why is Uncle Peter so rich?” “Because he began buying stocks in 1930 and never sold any of them,” she said. That statement has remained etched in my brain forever and it is the reason that I never sell.
Giving into temptation
Q: Well your motto of earnings first and foremost was certainly put to the test in the 90s. You invested another $483,600 and ended that decade with $14,830,200. With all that excitement during the dot-com era, did you waver from your rule? What were your worst buys that decade and why did you choose them?
A: Unfortunately, yes. I gave into temptation a few times. I chased some real high flyers. And every single time I did, I got burned. Three examples:
1. Avantek
That stock was a real high flyer. Something to do with microwaves. Located in Silicon Valley. The P/E was 40x. As always, I asked my mother if I should buy it.
“Only if you’re an idiot,” she said.
So I bought it.
And I did quite well. At first. I paid $16,000. It quickly went to $500,000. And then WHAM. It suddenly crashed to ZERO. It turned out that they had been cooking the books. That was my first taste of fraud on Wall Street.
2. Sun Microsystems
Then I bought Sun Microsystems. Another high flyer with a P/E of 40x. Completely against my mother’s advice. For the first few years, I doubled and tripled my money every single year. Then WHAM. The stock suddenly went to hell in a handbasket. Crashing so badly that it was worth less than I had paid for it. Oracle (ORCL) finally put me out of my misery and bought Sun Microsystems for cash. I still made less than I had paid for it.
3. Mindspring
Then I bought Mindspring. Another high flyer. That, too, did extremely well for a few years. Then it crashed. It finally ended up as Earthlink. I’m not quite sure what happened to Earthlink. But it’s not around anymore. And I lost money.
But I learned from these financial mistakes. Never deviate from your investment rules.
I don’t remember Avantek but the others I do. I had just started investing during that time. Those types of lessons are certainly painful. Especially something like Avantek, where you’re up 30x and then watch it go to zero. You can make lots of money during bubbles, but only if you sell.
Q: If you could go back in time, would you sell Avantek when it was up 30x and hence, break your rule? Or was this costly lesson actually worth it, because by getting that whipping, you knew not to misbehave again?
A: If I could go back in time, I would have listened to my mother and not bought Avantek in the first place. She told me not to buy Avantek or Sun Microsystems or Mindspring. They all had extremely high P/E ratios. At least 40, if my memory is correct.
My mistake was deviating from my strategy of buying high quality stocks with durable competitive advantages whenever they were relatively cheap.
I am strongly opposed to selling. You may save some money by selling stocks at the right time, however, the risk of selling a big long term winner like Abbott Labs or Philip Morris is just too great. So the best thing to do is to never sell.
Q: Well I was hoping to catch you in a scenario where you would sell, but you didn’t fall for it. How about your best buys that decade?
One of my best buys during the 90s was Automatic Data Processing (ADP). Since I bought it, the CAGR has been 14.28%. And it spun off Broadridge Financial Solutions (BR) which has had a CAGR of 16.02%.
That stock was recommended to me by my mother who got the recommendations from a smart friend of hers who spent at least 3 hours a day researching stocks. To succeed in the stock market, you need to learn who to listen to and who to ignore.
Moving along, we look at a snapshot of his portfolio on 12/31/2009. This, of course, was near the depths of the Great Financial Crisis, so the numbers aren’t pretty. The value was $16,007,200, or about 8% higher than 10 years prior.
Q: From 2000 to 2010 you invested another $1,395,000, which was about 3x the amount you invested during the 90s. Can you explain?
A: The reason that I tripled what I invested in the market between 2000 and 2010 is that the market crashed twice. From 2000-2002 and then again from 2007 to 2009. I love stock market crashes. So I invested 3 times as much money in the stock market between 2000 and 2010 than I did between 1990 and 2000. I also had more money to invest later on, which was a big help.
Q: What do you regret most during this decade?
A: One of the worst mistakes that I ever made as an investor happened in 2002. I had been a shareholder of The Williams Companies (WMB) since 1984. In 2002, WMB fell from $50 per share to 50 cents per share and the dividend was eliminated. The only reason that happened is that people thought WMB would be another Enron. But it was not true. So I decided to buy 100,000 shares of WMB at one dollar per share. But at the last minute fear got hold of me and I decided not to throw good money after bad.
Huge mistake.
Within a few years, WMB rose from 50 cents per share to $64 per share and the dividend was raised to $2 per share. So I would have made $6,300,000 on a $100,000 investment within a few years and received another $200,000 a year in dividends. Fear and greed are deadly to all stock market investors.
Q: I know from your comments you aren’t a fan of automatic dividend reinvestments. Would you mind explaining?
A: Whatever money I invested in 2002 and in 2009 when the stock market was extremely low did very well for me over the long term. That’s why I do not automatically reinvest dividends. I prefer to invest more when the stock market is low or when I find a stock that is substantially oversold.
Staying true to oneself.
Last decade he did quite well. He started 2010 with $16,007,200 and by the end of the decade, he had $74,890,000. Yes, he added $4,185,000 of new investments but an estimated 66% of that consisted of reinvested dividends.
Q: Your total return from 2010 to 2020 was about 360%, while the S&P 500 did 189%, so you basically doubled the market. What were the largest contributors to this outperformance?
A: The largest contributors to this outperformance were:
1) Staying the course. There is a famous saying that in order to succeed in life you just have to show up. Louis Rukeyser on “Wall Street Week” always used to say: “Just stay the course.”
So that’s what I did. I did not try to time the market, but I just stuck with it through thick and thin.
It is not timing the market, but time in the market that brings the best returns over the long term.
2) Not feeling the need to constantly buy. Charlie Munger said: “Assiduity is the ability to sit on your ass and do nothing until a great investment opportunity arrives.”
3) Maintaining my discipline of trying not to overpay for stocks.
4) Focusing on stocks that had consistently rising earnings and dividends.
5) Trying to keep my expenses low so that I would have extra money to invest.
6) Having a mother who is a much better investor than I am and listening to her investment advice.
Q: What are some specific names that really pulled their weight in delivering your portfolio performance that decade?
Q: Those 3 names make a good point. When people look at your profile which lists your entire portfolio, they will see famous long term winners like Amazon (AMZN), Apple (AAPL), Monster Beverage (MNST), and Netflix (NFLX). However, those are relatively recent buys from the past 1-5 years. What I want to drill home is that for the most part, you became rich with the compounding magic of what many would consider to be boring companies. Correct?
A: Yes.
So far this decade, he has added $2,790,000 of reinvested dividends and new money. Inclusive of that, he is up about 17%, bringing his portfolio value to $86,670,000. By my calculations, at least half (48.28%) stems from the 3 very first stocks he bought 52 years ago; Abbott Labs, Exxon Mobil, and Philip Morris.
At that time, all 3 of those were large companies. Most people would have probably said they were already too big to make someone rich. However, even a big boring company, if it has real cash flow and better yet, dividends to reinvest, can produce extraordinary gains for you over time. Especially if you hold onto their spin-offs. Abbott spun off AbbVie last decade. Philip Morris has a long history of spin-offs including Altria (MO), Kraft Heinz (KHC), and Mondelez (MDLZ) among others.
How should you invest today?
Q: Which 3 stocks today do you see being similar to the Abbott/Mobil/Philip Morris of 52 years ago. Big companies which people think have limited upside, but you think might still make someone wildly rich, if they hold onto them long enough?
A: To answer this question, I went to Macrotrends stock screener and used the following criteria.
1) Market cap over 50 billion
2) 10 year CAGR 20% minimum
3) 20 year CAGR 10% minimum
4) ROE….10% minimum
5) EPS change 5 years……100% minimum
6) Sales change 5 years……100% minimum
And the following 3 stocks stood out.
1) Thermo Fisher Scientific (TMO)
2) Adobe (ADBE)
3) Cigna (CI)
It’s funny he mentioned Macrotrends, because it was a good lead into my next question. I use Macrotrends daily, as I love their free 20+ year charting. YCharts charges for going back 5+ years.
Q: No matter how wonderful they may be, both you and I do not pay for investment services or websites. Since we both live off our investments and therefore live on fixed incomes, we just can’t afford such extravagances.
When Seeking Alpha put up the paywall, I started writing an article once every 30 days to get free Premium access. The community has greatly missed your commentary on investment articles. Will you consider finally investing in Premium? If you can’t justify the splurge for yourself, think of it as a charitable act, so you can spread investment wisdom to the youngins.
A: That would most likely depend on what it costs.
If it’s a buck fifty a month like those foot long wieners with a diet Pepsi at Costco (COST), I might consider it. That actually comes to $1.60 if you include the tax. But the heart surgery you will need later will most likely cost at least $200,000 so you had better have good insurance.
Spreading my investment wisdom?
I mentioned that idea to my 101-year-old mother who has been my stock market mentor for the past 52 years.
“What wisdom?” she asked.
She has warned all 3 of my children never to take any stock market advice from me, but to go to her instead. To be honest, she is a much better investor than I am, and I always get her opinion before I buy any stock.
I would be remiss if I did not sneak in a question about his mother. She is 101 or 91 years old, depending as to whether you ask her or her driver’s license. She is a divorcee who basically had nothing in her 40s and rebuilt her life, becoming an even more successful investor than her son.
Q: We’re going to close this out with advice not from you, but the even greater guru, your mother. What 10 commandments can she give today’s youngins, so they can become successful investors like her and you?
A: My mother had the biggest influence on me. She believed in the following rules.
1) Never spend the principal.
2) Only buy stocks when they’re cheap, preferably during a bear market, and preferably when they are in the lower half of their 52 week price range.
3) Buy stocks that have done well over the long term whenever they’re cheap.
4) Never sell.
5) Pay attention to the credit rating, current and historical.
6) Pay attention to the debt-to-equity ratio.
7) Stocks that raise their dividend every single year are best, particularly since we never sell.
8) Pay attention when good long term investors like Warren Buffett, Charlie Munger and John Templeton speak. No sense in trying to reinvent the wheel.
9) Do not automatically reinvest dividends. Accumulate the money and then buy good stocks whenever they’re cheap.
10) Never chase the horse when it is out of the barn. Meaning never overpay for a stock.
Closing thoughts
Is Buyandhold 2012 (and his mother) an anomaly? Can you really produce outsized gains by never selling your stocks?
I think you can. It’s not something you should be surprised by.
For starters, internal emotions – not external threats – are probably the biggest obstacle an investor faces. For some odd reason, people love buying stocks after they’ve run, while fleeing from them after they’ve fallen. FOMO snowballs, driving stocks and sectors to extremes. This is typically not a short-term process, as it can go on for many years before the fashion show changes trends.
Yes, you can make lots of money chasing momentum if you time it right. Investing trends can last a decade or longer, which makes it harder for newer investors to decipher normal vs. not. Typically, only after you have actively invested over multiple market cycles (decades) do you come to appreciate this. Buyandhold 2012 may have looked like a loser during certain eras, but certainly not in the long run.
The approach of buying and committing to never selling is one way to not get caught up in the FOMO or undue despair. It keeps your emotions in check because well, you’re not allowed to act on them. You can only hold, come hell or high water.
Another benefit, going back to the Buffett 20 stock punch card analogy, is that if you knew in advance that you could never sell, you would be less inclined to get caught up in the irrational exuberance. Because let’s face it, whether it was the dot-com days of two decades ago, or the SPACs of two years ago, inside we all really knew these were games of musical chairs. Knowing they wouldn’t last forever, you probably wouldn’t have played to begin with, if you knew you didn’t have an exit option of selling. Nor would you have wanted to waste any of your 20 punches on that junk.
Last and perhaps most importantly is the fact that we’re stupid. No, I’m not talking about you personally, I mean all of us. Humans. The future unfolds based on an infinite number of variables. To believe we can accurately make long-term predictions on a sector or technology is downright delusional.
This is why I do not do discounted cash flow (DCF) analyses. They’re just guesses on top of guesses, which serve as comfort blankets for false assurance. The best professional analysts can’t even predict earnings a year out, let alone 7 or 10 years.
That doesn’t mean a predicted future won’t turn out similar to such projections. Rather, what I’m saying is to get there, there was a large component of luck. No, not lottery ticket type of luck. Rather, the stars had to align for all the variables outside of the company’s control, which could make or break them.
When Elon Musk founded SpaceX with his PayPal (PYPL) money, he had enough to do a max of 3 launch attempts. Those 3 attempts failed. He then went all-in with the very last of his money to fund a 4th in 2008. It worked. If it didn’t, SpaceX wouldn’t have gotten the $1.6 billion contract from NASA. If the highly controversial Commercial Resupply Services (CRS) contract didn’t exist in the first place, SpaceX would have run out of money even with that 4th successful attempt. This was during the depth of the Great Recession and investors weren’t funding anything. Without that contract, Musk would have likely been forced to sell SpaceX for pennies to big aerospace, as a best-case scenario, despite the success. Additionally, let’s not trivialize the fact that millions of technical variables had to go just right to get that rocket into orbit. Not all were in his control.
The point is, SpaceX becoming a $125B company was not inevitable, even with the genius of Musk. It required luck outside of his control. Likewise for Tesla (TSLA) which as recently as 2017-2019 was a month away from bankruptcy. It was only a few hundred thousand dollars away from bankruptcy on Christmas Eve 2008. It was the star power, pun intended, of Musk succeeding with that rocket which gave his Tesla investors the confidence to put more money into electric cars a couple months later, despite the macroeconomic tsunami. Just one day before, on December 23rd, that $1.6B NASA deal was officially announced.
Now if any one of those variables went wrong and SpaceX failed, likely Tesla would have failed. If you were an investor in either, you would look like a fool. Now you look like a genius. It was some luck which made the difference.
Public companies go through these roller coasters, too. With emotions running hot and the ability to stop the bleeding with a sell order, you will be tempted to bail. Maybe bailing turns out to be the right decision, but maybe it isn’t. Maybe you sold the next Tesla just when things looked their bleakest.
Perhaps the only way to overcome such temptation is to accept the fact that such distinction – future success or failure – is impossible to predict. Perhaps our best bet is to put our best efforts into our research, wait for the opportune time to invest, and then shove our chips on the table. Whatever happens, happens.
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