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There's No Such Thing as a Forever Stock

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For many investors, buying stocks and holding them for the long run is the core principle they follow. Even Warren Buffett has said that "our favorite holding period is forever." But if you invest your money as if every stock you ever buy is one you'll hold forever, you're going to get burned -- because you'll often end up watching hard-earned gains dwindle to nothing.

A perfect picture
The most recent example of this phenomenon is Eastman Kodak (NYSE: EK  ) , which plunged last week on rumors that it would have to file for bankruptcy, potentially leaving current shareholders with a complete loss on their investment. From its heyday as a technological innovator, Dow Industrial stock, and member of the elite "Nifty Fifty" of the 1960s, the company failed to keep up with the pace of the transformation in its industry brought on by digital photography.

As a "forever" stock, Kodak has turned out to be a huge disappointment. But plenty of investors made lots of money on the stock. From 1990 to 1998, the stock more than tripled as the company participated in the tech boom. Only after the tech bubble burst did Kodak begin its final slide toward its current predicament.

Forever is a long time
Countless stories like Kodak's have played out over the decades for stock investors. Recent history is full of them:

  • One conglomerate promised to boost its profits by emphasizing its dynamic finance arm over its staid industrial segments. That company was General Electric (NYSE: GE  ) , and it fell into the trap of the financial crisis. The stock has given up all of its gains from the 1980s and 1990s and remains at half its 2006 level.
  • One financial stock built an empire that spanned consumer and investment banking as well as insurance and eventually spawned the spinoff Travelers (NYSE: TRV  ) . Yet heavy losses from mortgage-backed securities during the subprime mortgage crisis pushed the company to the brink of ruin, and now Citigroup (NYSE: C  ) is only a shell of what it once was -- and its stock may never recover to its past levels.

I could go on with other dramatic stories like these, but the point should be clear: Even successful companies can fail to deal well with catastrophic changes, and shareholders who blindly vow to hold on to their shares come hell or high water often join in that failure.

Sticking with the best
But not every argument against buy-and-hold investing involves some huge meltdown. Sometimes, industries simply go through a changing of the guard among their leaders. Smart investors attune themselves to those cycles and avoid owning has-been stocks once they're past their prime.

One example is Wal-Mart (NYSE: WMT  ) . The retail giant's shares haven't plunged recently; in fact, the stock was among the best performers during the 2008 market meltdown. But Wal-Mart hasn't produced anything close to the huge returns that it gave shareholders for the first decades of the company's existence.

The problem Wal-Mart faces is simply the law of large numbers. Having moved beyond simple retail to challenge more specialized players like SUPERVALU (NYSE: SVU  ) in the grocery space, Wal-Mart will struggle to find new ways to grow. Meanwhile, as Internet retail picked up steam as a convenient way to shop, online retailer Amazon.com (Nasdaq: AMZN  ) emerged from the ashes of the tech bust to put up amazing returns over the past decade.

I'm not saying that Amazon is destined to beat Wal-Mart's stock performance going forward. The key, though, is to understand that a shift in leadership would change the winners and losers in the industry, increasing the likelihood that Wal-Mart would cease to be the best-performing stock in the space.

Stop looking for forever
It's going too far to say that buy-and-hold-forever investing is an excuse for laziness. Many great investors pay plenty of attention to their stocks while still trying to hold on to them for as long as they can. But you'll do much better with your investing if you maintain a critical eye toward all your holdings -- even those you're hoping to hold forever. If you stay on the lookout for potential problems, you won't suffer the surprises that spelled big losses for shareholders of Kodak and countless other stocks.

Learn more about Wal-Mart's story and the companies that are posing the biggest threats to the retail giant in the Fool's free special report "The Death of Wal-Mart."

Fool contributor Dan Caplinger will probably be humming "Dust in the Wind" all day now. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Citigroup, SUPERVALU, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Amazon.com, as well as buying calls on SUPERVALU and creating a diagonal call position on Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy may not last forever, but it'll serve you well as long as it's around.


Read/Post Comments (4) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2011, at 3:31 PM, TMFDivine wrote:

    I agree that there is a lot to be said for staying well-informed about your holdings, even (or maybe even especially) when you buy a stock for its long-term outlook. Companies change, and Wal-Mart is a good example of a firm that can no longer sustain the incredible growth it enjoyed for many years, if only because of its massive size.

    The danger I think you are overlooking is how keeping a constant eye on company dynamics all too often leads to rash, emotional investment decisions. It's hard to keep the long-term picture in clear focus if you are constantly eyeing the stock's performance. Emotions will often trump rationality; for the few dedicated long-term investors that have held Wal-Mart's stock since the beginning, for instance, imagine how many countless others have been scared into selling WMT over the years due to something like a disappointing quarterly earnings report or an analyst's downgrade, missing out on huge long-term gains!

  • Report this Comment On October 10, 2011, at 7:17 PM, richardrollo wrote:

    I did a little bottom feeding here. There seems to be two sets of numbers floating around, one that says that the current price is about right and another that says they are undervalued. The controversy revolves around total income and pension debts. This article seems confused as well. In the second paragraph, it states: "the company failed to keep up with the pace of the transformation in its industry brought on by digital photography." Then, in the third paragraph there is this: "From 1990 to 1998, the stock more than tripled as the company participated in the tech boom. Only after the tech bubble burst did Kodak begin its final slide toward its current predicament."

    I'm only pointing out there seems to be a lot of confusion about what Kodak did wrong and what it is worth. One issue that is not in dispute is the management has been less than adept.

    Most of my holdings are conservative dividend reinvestment stocks most of them recommended in one column or another by Motley Fool. Looking at their products and their largest shareholders, I just don't see this company going under. At worst, I think I'll be cashed out.

  • Report this Comment On October 11, 2011, at 4:03 AM, MichaelDSimms wrote:

    T has been around a long time and isn't doing badly.

  • Report this Comment On October 11, 2011, at 7:53 AM, TMFGalagan wrote:

    @divinezone - I completely agree with everything you're saying here. I think you have to keep a rational eye on what's going on with the companies whose shares you own, having a plan in advance of what you expect and warning signs to look for. That way, if disturbing news comes, you won't panic - you'll just calmly assess it, and if it meets your selling criteria, you'll rationally sell without any qualms.

    best,

    dan (TMF Galagan)

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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