Today my phone, with it’s knowledge of my online reading habits, suggested that I read this article, which is about buy and hold investing. Specifically, the author makes the point of how difficult it can be holding onto stocks for the long run, without making any regrettable emotional decisions.
The author uses an example of a company whose stock went up 80 times what it was worth in 2000. This, of course, is incredible growth. If you started with only $1000 in that stock back then, you’d end up with $80,000 today.
That’s the kind of score that makes a massive argument for holding onto stocks. As the author says,
Our brain that works with perfection in hindsight would lead us to believe that buying and holding the stock during these 19 years would have been an easy choice for anyone who did it. After all, the only thing the investor would have done during these 19 years was, well, nothing.
Seeking Alpha, “Buy and Hold: Simple, Not Easy”
I wish investing was that easy.
And then the author points out how, in actuality, holding on for 19 years might not be as easy as it seems, and all the decisions that had to be made not to act in times when it might have been tempting to.
As Jason Zweig quotes in “Your Money and Your Brain,” the misfortunes of men come from not knowing how to remain at rest in a room! In other words, it is far easier to look backwards and know what one should have done than it is to stay the course while in the midst of the tumult, when the outcome is uncertain, and when human psychology can easily be influenced either by greed or fear to make rash decisions.
I love reading things that point this sort of thing out. Rather than sugar-coating the process of investing, it reminds us of one of the biggest threats to our long-term success… ourselves!
A few days ago I read a very relevant passage in the Warren Buffett biography. Back in the middle of the 1970s, one of Buffett’s investing partners got so scared during a market downturn that he sold half of his family’s Berkshire Hathaway shares. This passage highlights how the mind can play tricks on people in challenging times:
Henry Brandt pulled Buffet into a separate room and asked him to promise that Berkshire stock wouldn’t drop below $40. By October 1975, the stock had been cut in half after trading at $93 just two years before. “Look, I love you,” Buffett recalls saying, “but I can’t promise you that.” “The world is ending,” said Brandt, or words to that effect. “I’ve got every dollar I own in this stock.”
The world continued to end. Even though the rest of the stock market was recovering, Berkshire was not. Brandt panicked and called Buffet, who offered him $40 a share. Then Brandt called Walter Schloss and said, “Warren will pay me forty dollars and I want fifty. What should I do?”
….Schloss worked on him for two hours, saying, You’ve got the smartest guy in the world managing your money, in effect, and Warren doesn’t charge you anything, you’re making a big mistake to sell. “I thought I convinced him,” says Schloss. …. [But] the country was in a mood of such profound pessimism that it affected people’s judgment. “On Monday he called his broker,” says Schloss, and began selling–his wife’s shares, not his own–until half their shares were gone.
“The Snowball: Warren Buffet and the Business of Life,” Alice Schroeder, p419
This man, overcome with panic that his shares would go down to zero, gave into his emotion and sold, despite other’s attempts to talk him down off the ledge. Of course, it’s even worse that he sold his wife’s shares!
Considering that Berkshire Hathaway Class A stock are now valued at over $300,000, this seems especially tragic. Yet how could he know back then in 1975, in the midst of a market downturn? How many of us really are prepared to keep our heads on straight in the midst of uncertainty?
It’s easy to see it in hindsight, but in the actual thick of the moment, how often are we humans are tempted to muck things up with our actions? As a relative newbie to investing, in a time of a massive bull run, I have yet to really experience a dramatic market collapse. Yet I like to think that I am humble enough to be skeptical of my own emotions, and not succumb to naivete. And I am committed to doing absolutely everything it takes to keep my head on straight for the long haul.
Yet I do not take for granted that this will be easy!
One reason I like to study examples like these is because someday I too will face a challenging investing environment.
And as I have said before, I plan to just sit there… and do nothing.
God willing.