Has Buffett Been Wrong All Along?

With the market still down some 42% in the last year, financial pundits continue to eulogize "buy and hold" investing as a dead strategy, insinuating that trading is the only way to make money going forward.

"Dr. Doom" himself, Marc Faber, even told CNBC recently: "The Warren Buffett approach [of buy and hold] is dead and it's been dead for ten years and it's going to be dead for another ten years."

Win one for the Oracle
To be sure, the recent market volatility has been more than a little a bit unnerving, but before you take these comments to heart and begin day-trading orange juice concentrate futures, consider that the past ten years, in fact, have not necessarily been all that bad for buy-and-hold investors.

For example, if you had simply invested $1,000 in each of the Dow 30 components on January 4, 1999 and spent the next ten years on the moon, here's approximately what you'd have had when you returned this past January:

* Data provided by Yahoo! Finance, as of Dec. 31, 2008.

The good, the bad, and the ugly
It's true that these returns wouldn't exactly have you jumping for joy. But while capital appreciation was basically flat, your investment bore fruit in the form of dividend growth that significantly outpaced the rate of inflation.

That may not seem like much, but it was still well ahead of the Nasdaq 100, down 40%, and the S&P 500, down 15%, over the same period.

It's also worth noting that dividends were not reinvested in these calculations. If they had been reinvested over the period, the portfolio value would have been higher since you would have purchased more shares at varying prices from 1999 through 2008.

And this is all true despite the fact that January 1999 was not itself a great time to make a large, one-time investment, since stocks had already been on a solid bull run for a few years and dividend yields were near historical lows.

Losers and winners
Although some Dow stocks certainly underperformed -- Eastman Kodak (NYSE:EK) and General Motors (NYSE:GM) come to mind -- but there were also some big winners that were best bought and held for the long term:

* Data provided by Yahoo! Finance.

None of those are returns you'd be embarrassed to admit to today. So, what was that again about buy-and-hold being dead?

Proceed with caution
The advice to forget "buy and hold" investing is extremely dangerous for individual investors. Why? Because we do not have any advantages over Wall Street when it comes to trading.

No, our major advantage over Wall Street comes when we choose to be investors. Consider:

• Unlike institutional money managers who often have outside pressures forcing them to rapidly buy and sell their holdings, our buy and sell decisions are left up to us and us alone. We can focus on buying great companies when the stock price and business potential are compelling and sell when we believe the investment's value is waning -- and that means we can hold for the long term, even when institutional investors can't.
• Time is on our side. To paraphrase Vanguard founder Jack Bogle, in the short-term, stock prices are primarily affected by perception, while in the long-run, they are affected by reality. In other words, if we buy great companies at attractive prices and give those companies time to realize their potential, we have a much better shot at making money. Let the traders deal with the stress and uncertainty that comes with daily price movements while we allow our dividends -- and our initial investments -- to compound over years and decades.
• Perhaps most importantly, by making careful investment decisions at the outset and holding those buys patiently, individual investors can save untold thousands of dollars in unnecessary taxes and trading costs over the long-run. Institutional managers could care less about costs and taxes, since both are recouped by fees (paid by you) or are distributed back to shareholders (that means you, again).

Now's the time to be patient
So the next time you hear a talking head denouncing the merits of buy-and-hold investing, don't be discouraged. Buy and hold is exactly the strategy that has the best chance of working -- for the individual investor.

Solid dividend-paying stocks only enhance that strategy. But with dividend cuts making headlines, it's more important than ever to continue to focus on well-run companies with great prospects, lots of free cash flow, and a strong track record of rewarding shareholders with generous dividend payouts. The market will prize such companies over the long-run and it will serve you well to invest in them today, especially with many trading at enticing prices.

One buy-and-hold investment to consider right now is Johnson & Johnson, recently named by our Motley Fool Income Investor team as one of their eight "buy first" stocks. They believe it will continue to serve investors over the next decade as well as it has for previous decades. If you'd like to learn more about the other stocks our Income Investor team is following right now, a free 30-day trial to the service is yours. To start your trial, please click here.

Todd Wenning wonders if Wall Street has moved to K Street. He does not own shares of any company mentioned. Johnson & Johnson is a Motley Fool Income Investor selection. Like Richard Marx, the Fool's disclosure policy will hold onto the night.