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Here at The Motley Fool, we like to advocate for buy-and-hold investing, a strategy of buying a promising stock and holding it for the long run through business cycles and volatility.
The buy-and-hold approach benefits from its avoidance of commissions and taxes that come with more frequent trading, but its real appeal lies in its simplicity. If winning at the stock market was as simple as picking a few home runs and holding them until retirement, who would do it any other way?
Unfortunately, the buy-and-hold strategy has an evil twin you might call buy-and-forget: buying a stock and then ignoring it for months or years to come. Allow me to digress.
The evil twin
In December 2002, I made my first stock purchase, buying JetBlue Airways (Nasdaq: JBLU ) for a split-adjusted price of $11.38. It was a young upstart company in an industry struggling after 9/11, and I thought, like Southwest, it would beat the competition.
At first, it looked like I was right. Jet Blue's share price shot to over $30 (split-adjusted) on strong growth, before diving back in the teens again by the end of the year as that growth disappeared. In 2007, the airline got some bad press for leaving travelers stranded in planes, which, along with the general decline in the market starting later that year, sent Jet Blue's share price to under $4 by 2008. Unfortunately (or fortunately, perhaps, since I had lost over half my initial investment by this point), I was aware of very little of this.
I would check the stock quote and recent news from time to time and I was aware of the incident with the stranded passengers, but there were also whole years that went by where I was simply living in blissful ignorance of my investment, content to cross my fingers and sleep with a company flight map under my pillow. This was buy-and-hold, right? Just buy some stock and watch your investment grow.
When I checked on it for the last time, in May 2011, it was trading near $6 -- as it had been for a year. Seeing no prospects for growth, I took the loss and sold.
Learning the hard way
Holding a stock for nearly 10 years and losing half your money is frustrating, so I'm beginning 2012 by resolving not to buy and forget. To avoid that trap, there are a number of steps I plan to take, and I encourage other investors to do the same:
- Have an investing thesis, and be able to articulate it.
If you can't explain why you bought the stock in the first place, it's only going to be that much harder to decide when and why to sell it. Did you buy because of solid management, outstanding growth prospects, hidden assets, or just a great company at a great price? Know why you purchased those shares so you can challenge your thesis as conditions change.
- Follow your investments.
At the very least, I intend to read quarterly earnings reports for all my investments. Ideally, I would like to keep up with any breaking news or sharp changes in the share price that could indicate important changes in the company. The Fool's My Watchlist feature can help you keep an eye on your investments by making any new developments easy to find.
- Don't be afraid to sell.
Buy-and-hold can work for some stocks, but if your investment isn't panning out the way you thought it would, don't let your own hubris get in the way of selling. One of my favorite investing proverbs is: "A stock doesn't know you own it." If you're waiting for a stock to break even, you may just as likely be waiting for it to turn worthless.
Of course, buy-and-hold can work for the right investments. Looking back at the 20th century, stocks like Coca-Cola (NYSE: KO ) and McDonald's (NYSE: MCD ) dominated because they were well-recognized global brands that sell repeatedly purchased products. Of course, you still wouldn't want to put your head in the sand even if you're holding a "rule maker" like one of these companies. But they will likely be much more stable than an investment in the volatile airline industry, or in a growth company with an uncertain future, or in a stock like Netflix that is reliant on new technology and competes in an ever-changing industry.
Knowing what kind of company you're investing in can be just as important as any other part of your investing thesis. If you're looking for some more stocks that would be great to buy and hold, I have some good news. Our experts here at the Fool have just released their free report on the three American companies set to dominate the world. McDonald's is one of them. Find out what the other two are by clicking right here.