I am lucky enough to have married a girl from Hawaii. Every three years or so, we fly over there to visit her parents for Christmas and New Year's, and last winter was one of those times. On that trip, I tried an experiment: While in Hawaii, I spent those two glorious weeks without checking my portfolio. Until then, I'd never gone so much as half a day without checking those stock prices.
How did I ever survive?
What if the market closed for five years?
Warren Buffett recommends picking companies as though the market would be closed for the next several years. In other words, companies you'd be willing to buy even if you knew you could never sell.
Witness fast-food giant McDonald's (NYSE:MCD), which has recovered well from its doldrum days of just a few years ago as it reinvented itself, and airplane maker Boeing (NYSE:BA). McDonald's has returned 25% per year for the past five years. Boeing has returned 23% per year for the past five years as it overcame the downturn in orders following 9/11. It was difficult, but when you have faith in a company's operations, it's possible not to worry about the stock price even under dire circumstances.
Let others follow the leads of the breathless talking heads who want you to jump in and out of your investments based on the latest news. For instance, according to the Motley Fool CAPS tracking of Jim Cramer, he liked bed-maker Sealy (NYSE:ZZ) about a year and a half ago. After it had fallen 18% in a month, he changed his mind at the end of May 2006.
Two weeks later, it was up 3.6% and he called a buy. A week after that, it had fallen almost 11% and he turned thumbs down again. Yet only a few days afterwards, he changed his mind after a 2% rise. This time he slept better, not changing his mind again until he advised selling again in early December 2006 after a 20% gain. I know owning a bed company can be a downright sleepy experience, but Cramer seemed to enjoy jumping up and down on the bed more than anything else. Those who followed his advice exactly would have been down 11.9% overall, not including those additional commission expenses, while holders would have been down only 7.2% over the same time period.
This kind of in-and-out on a stock reminds me of the billboards around Times Square -- on, off, on, off. Too much!
Ignoring the razzle-dazzle
I like to sleep at night knowing I'm invested in stable, growing companies along the lines of Sam Adams beer maker Boston Beer (NYSE:SAM) and pet-supplies seller PetSmart (NASDAQ:PETM) -- two sturdy businesses that shouldn't leave shareholders awake at night with the hype of buy, sell, buy, sell.
Plain and simple, finding good companies and holding through all the daily and monthly fluctuations is the secret to building wealth. Boston Beer has rewarded investors with 18% annual returns as it grew revenue by 4% and net income by 8% annually over the past 10 years. PetSmart has returned 12% annually over the same time frame alongside revenue and net income growth of 11% and 24%, respectively. Both of these market-beating returns were made despite many market swoons along the way.
Of course, I'm not promoting that you buy stock in a company and then just forget about it altogether. After all, we don't want to end up owning the next Enron. "Buy and hold" doesn't mean "buy and forget" -- it just means avoiding the temptation to overanalyze our stocks or react to the daily hype. Not only will this more relaxed approach let us take advantage of the growth of our companies, but it will also lead to lower frictional costs -- commissions and taxes -- that cut into our returns. It might even help reduce our blood pressure.
Relaxed investing
Fool co-founders David and Tom Gardner take a relaxed path to investing, and advise Motley Fool Stock Advisor members to do so as well. When they recommend companies in Stock Advisor, they do so with a holding period of at least three to five years. While the brothers stay aware of their company's news as it happens, they don't jump at every event. They keep their eyes on the long-term prize.
For instance, game maker Electronic Arts (NASDAQ:ERTS) has been recommended three times -- in the spring of 2002, fall of 2003, and summer of 2005. Despite three separate 30% drops during that time, the picks have returned 87%, 25%, and (3%), respectively. By being relaxed and focusing on the long-term prospects of the company, the Gardners were not spooked by the large drops and have watched the price recover each time.
Relaxed, Hawaiian-style investing like that has let the brothers beat the S&P 500 index by more than 39 points on average since the newsletter's inception. You can try Stock Advisor for 30 days -- for free. You may never want to move back to the frenetic mainland.
This article was originally published on Feb. 17, 2007. It has been updated.
Jim Mueller enjoyed his two weeks of relaxation, but he wasn't so sure he would survive his experiment. He does not own shares of any company mentioned, though he enjoys Sam Adams. Both PetSmart and Electronic Arts are Stock Advisor recommendations. Take a relaxing moment to read the Fool's disclosure policy.
