Ever since I was a young 'un, I've loved the scene from Disney's Fantasia where Mickey casts a spell on the brooms to do his work for him. I really dig the idea of having someone or something else do all the backbreaking labor while I kick back with a cool drink and a good sporting event.
Unfortunately, it doesn't work out all that well for Mickey (whose brooms get bit out of control and then multiply like mad). But it is possible for the rest of us to get the first part of that without the second. Here's how: Let your money work for you. It's a great way to bring in some extra income -- and the bonus here is that it's a good thing if your money gets out of control and starts multiplying like crazy.
Buy and hold is dead
I had always seen the buy and hold strategy as the best way to build your long-term wealth while letting your money work for you. Buy and hold basically involves identifying high-quality companies whose stocks are trading at attractive prices, throwing the stocks in your portfolio, and hanging onto that stock for the long term. Unfortunately, it seems like everywhere I turn people are saying that buy and hold is dead, that it is no longer a viable way to invest in a post-Internet-bubble world.
So is buy and hold really dead? Heck no! Buying great stocks at hot prices is as fine a plan as it ever has been. Just like baseball, apple pie, and a great pair of jeans, this type of investing never goes out of style. In fact, the biggest drawback of this strategy is boredom. Yup, you heard me right, boredom. When you buy and hold stocks, there's no need to do much of anything on a daily basis. You don't need to glue yourself to real-time stock tickers, you don't need to reprogram your cell phone for on-the-go stock trading, and your broker won't be able to count on you to pay for that new Porsche through your commissions. All the heavy lifting is done for you by the company.
So if it's so great.
If you have trouble sticking with a buy and hold strategy, be assured that you're not alone. Mutual fund managers regularly turn over well in excess of 100% of their portfolios every year, with some particularly impatient managers finding the time to turn over more than 1,000% of their portfolios! And they do this despite the fact that all that turnover eats away at returns in the form of trading and tax costs.
Of course, you're not going to find too many of these ultra-high-turnover funds outperforming the market for any long period of time. While many of them do manage to put up some good returns for a couple of years, you'd be hard pressed to find a manager that turns over 500% or 600% of his or her portfolio and has a track record like, say, Bill Miller. Miller, who runs the Equity Trust and Opportunity Trust funds for Legg Mason
Well, not that crazy to guys like Peter Lynch and Warren Buffett. They made famous some of the value investing ideas put forth by the great and venerable Benjamin Graham -- author of Security Analysis and The Intelligent Investor. Both would likely agree that the best way to invest is to find solid stocks and hang onto those suckers as long as you can.
Getting in action
If you've made it this far, I'll have to assume you're on board with me that buy and hold isn't dead. Luckily, putting a buy and hold strategy into action is simple -- not always easy, mind you, but simple. The first step is to find attractive stocks. Fools tend to look for companies that show solid financial results, year-over-year growth, a strong management team, and some sort of "special sauce" that allows them to maintain an industry-leading position. Next, you need to determine whether the company's stock is trading significantly below its intrinsic value. You can do this by using valuation techniques such as a discounted cash flow analysis. When you find a stock that passes both of these filters, you've likely found something that you can lock away in your vault -- er, portfolio -- for years to come.
While I think there is room in every portfolio for some amount of speculation, for a buy and hold strategy, we're talking about companies like Microsoft
I'd be a bit remiss if I left it here; buy and hold is pretty simple, but we can't completely "set it and forget it" like that wonderful Showtime Rotisserie. After you've built up a nice portfolio of premium stocks bought on sale, you still need to check up on them from time to time. This involves keeping tabs on any big news releases from the company and listening in on quarterly conference calls to make sure that the business hasn't materially changed to the point where the stock isn't worth what it used to be worth. On the flip side, you'll also want to have a general idea of how Mr. Market is valuing a stock; just as you were able to buy it at a discount, there could be an opportunity down the line to sell it for much more than it's worth -- and who can argue with that?
Of course, finding the best stocks to get your money working hard for you can take some practice, so if you need a hand while you get your sea legs, you may want to check out my fellow Fool Philip Durell and his Motley Fool Inside Value selections.
Valuable Foolishness abounds:
- 2 Things I Learned From Benjamin Graham
- How to Buy Low and Sell High
- 4 Critical Errors You Must Avoid
Microsoft is an Inside Value pick. Johnson & Johnson is an Income Investor selection. What type of investor are you? Talk stocks with other investors and our analysts when you give our newsletters a try.
Fool contributor Matt Koppenheffer tries his darnedest to know the price and the value of everything. Though he doesn't own any stocks mentioned in this article, one thing he knows for sure is that the Fool has an ironclad disclosure policy .
