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The following is a guest post by Daniel at the Guru Five
Berkshire Hathaway is a well-capitalized group of diverse companies whose free cash flow is ably managed by the world’s greatest investor. However, the price of a share of Berkshire has declined by roughly 40% of late, wiping out years of gains. Is “buy and hold” dead?This question seems to get asked every time a period of bad performance is turned in–whether by one’s managers or by oneself. And, not surprisingly, the time frame for those who say “buy and hold” is dead–or should be–without fail is unjustifiably short.
Consider Berkshire. At 92,000 for a share, the price to own that much of the company has done all of nothing for the past three years. This is something new–right? It’s something that requires you to rethink finding a great company at a good price and then sitting on your hands and doing nothing–or is it?
In the lead-up to this year’s shareholder meeting, almost every journalistic introduction stated that this event would be more sober than in year’s past. After all, they said, shareholders have been used to the steady growth of Berkshire–year after year, without fail.
Consider though: periods of a company’s stock price not going anywhere for years is not something that just started over the past two. Not even for Berkshire.
For example, the stock price did nothing from around 1998 to 2003. Five years and nothing to show for it! Then, too, shareholders and journalists were asking: “Is ‘buy and hold’ dead?”
In actual fact, the “buy and hold” strategy is not dead–and should not be–it simply depends (as it always has) on what it is you are holding and the relation of its quoted price to what it is worth.
As Berkshire shareholders for the most part know: periods of underperformance come and go, but if the business is great, the prices paid for them good, and the cash they throw off invested accordingly, the market price will catch up with the growth in underlying business value at some point.
Rather than ask whether the “buy and hold” strategy is dead, asking how to find the companies that can be held long-term is sure to give a better answer.
Then, once you find them, it’s mostly a matter of finding out whether the company’s selling at an attractive discount from intrinsic value. (Given this environment, I’d guess that you’ll be in luck.)
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