Only Fools Believe In Buy And Hold, The World Is Ending, Etc.

When I discuss the concept of holding stocks for 25+ years and letting the growing cash dividends surround you like Scrooge McDuck when he does his daily money bath swim, I often hear from people that wonder how you can avoid investing in some of the companies that have fallen from their former glories such as Eastman Kodak, Sears Holdings, etc.

In the case of Eastman Kodak, you would have beaten the S&P 500 since 1993 had you taken your Kodak dividends as cash and held on to the Eastman Chemical shares that would have been spun off your way.

Now, I’d like to take a moment to review the historical performance of Sears since 1993.

For one moment, let us pretend that we are back in time, initiating a position in Sears Holdings in June 1993. Although Sam Walton’s Wal-Mart empire has moved from nipping at the heels to overtaking the legendary retail empire. Although Sears had fallen on relatively hard times, you felt confident that things would turn around. After all, very few companies move from strength to strength without any hiccups along the way, and part of being a “forever” investor involves having some “Que Sera, Sera” DNA in your genes.

The past two decades have been especially hard on the retailer, as profitability declines in hardware and home appliance, mixed with an unfortunate merger with K-Mart in 2005 has caused the company to go from generating billions of dollars in profits for shareholders to losing an estimated $400 million over the course of 2013. Surely, I thought, two decades of descent from dominance to gasping mediocrity would make this June 1993 one of the worst investments possible over the past two decades.

My initial impression was wrong for one reason: stock spinoffs.

Over the past twenty years, Sears had been shedding all of its valuable, profitable components to shareholders. Sears divested itself of its Dean Witter arm, which went on to get gobbled up by Morgan Stanley. It divested itself of Sears Canada. It also spunoff to shareholders its Allstate and Discover Financial Services arms of the company.

The net impact of the Sears spinoffs is this: according to Frank Bifulco, the manager at Portfolio Channel, if you bought 100 shares of the old Sears in June 1993, here’s what you’d have today: 50 shares of Sears Holdings, 156 shares of Morgan Stanley, 21 shares of Sears Canada, 184 shares of Allstate, and 78 shares of Discover Financial Services.

Your total returns over that time? 10.3% per year. Had you invested in the S&P 500 in June 1993, you would have had just shy of 9% per year. Even though the core Sears company has largely disintegrated, the collection of four spinoffs would have not only offset your losses from the collapse at Sears, but you would have actually created a bit more wealth over the past twenty years with a “buy-and-forget-it” attitude regarding Sears than a run-of-the-mill index fund. Sears! The company that will experience death as soon as someone pulls the plug to the oxygen tank. Beat the S&P 500 over the past twenty years!

This is a huge advantage for you when investing—most of the world is wired to only think in terms of stock charts. A company traded at $X dollars then, it trades at $Y dollars today. That kind of logic does not connect to reality because we have dividends and stock spinoffs. On a year-to-year basis, it may not seem like much—but when you start measuring things out in decades, you start to see a difference.

About a year ago, BP traded at $42 per share. Now it’s at around $46 per share. The average lay investor might just look at that and think, “Okay, BP investors made 10% or so in the past year.” The thing is, you would have collected four $0.54 dividends since then, putting an additional $2.16 per share in your pocket. If that stock chart included dividends over the past year, that BP share would effectively be trading at $48.16 per share. That’s the difference between making almost 15% in one year and almost 10% in one year. And that’s just four dividend payments—imagine what happens over a twenty-year period when there are eighty dividend payments to take into account.

In the cases of the cases that seemingly document blue-chip failures (General Motors, Wachovia, Lehman Brothers, etc.) there is usually a long record of dividend payouts that preceded them. Oftentimes, collecting a growing dividend for 15+ years can be enough to guarantee that you breakeven from a “failure” scenario. Many of these failures also spun off other holdings along the way, and if you held on to them, a hold-it-and-forget-it strategy would have created a lot more wealth than the failure in a few specific cases might initially portend. Even with failure, there is often a backstory that indicates more wealth gets created than you might initially think.


Originally posted 2013-12-12 02:35:56.

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6 thoughts on “Only Fools Believe In Buy And Hold, The World Is Ending, Etc.

  1. says:

    Warren Buffett argues that buy-and-hold saves trading cost. There is really little reason to trade too often unless you really need the money.

    That said: Asset stripping (by itself or pressure from corporate raiders/activist shareholders) is a big red flag, and so is serial acquisition. And don't get me started with Carl Ichan.

  2. says:

    I have thought of this very point recently with respect to various bond funds, which have taken a serious enough dive in the past year that on paper makes it look like I'm underwater. But when I count up which of my "purchases" are actually reinvested monthly dividends, it turns out I'm still ahead. Am I missing something here, or should broker statements perhaps include an additional page that sorts your direct cash purchases from reinvested dividends, since that would give a truer and more accurate picture of how your investment has done over time?

  3. says:

    @Andrew Hidas

    As a bit of side track:

    IMO a problem with bond fond are in the expenses. Interest rates are cyclical, so bond prices are cyclical as well.

    However, bond fund expense ratios tend to be quite high – PIMCO Total Return has expense ratios (if I don't quote it wrong) is 0.85%. That is very substantial relative to bond yield (Current 10 yr T-Note yields is 2.8-2.9%). Why buy a bond fund when you can buy actual bonds? Your broker will have them, and you can buy Treasuries directly from Treasury Direct as well.

    Therefore if you hold actual bonds and buy some each year (dollar cost averaging – bond style), you will do fine. In fact that mimics Bill Gross total return when you use the pay outs to buy new bonds.

  4. says:

    Thanks for that, SChan, have considered doing so but more for the predictable income stream and stable principal than for expenses, which in my bond funds run only to .10 for the index funds and about .20 for the actively managed. What's the general expense ratio for individual bond brokers?

    Would very likely still come out better with individual bonds, but the convenience factor comes into play as welI with consolidating one's financial life into one fund family or broker. I may yet go the laddered bond route as I get nearer to retirement, though.

  5. Edwin Nelson says:

    Rather curious. Got some new ideas. But investigating this matter I came across some sensational website where I could find complete information on this question in one place. offers not only one personal opinion but the chance to compare various authors, experts and companies and provides arguments so that you could choose the one close to you.

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