Is Buffett right: can you hold a stock forever?
INVEST is generally not seen as a romantic endeavor. Still, the idea of ââbuying a company’s stock and holding it for a lifetime can be a momentary tug.
Investing in a “forever stock” – one that you buy and hold forever (ish) – is an investment strategy that has high profile admirers. Warren Buffett, perhaps the world’s most famous investor, once said that his “favorite period of holding stocks is forever.”
The idea is to buy a big business, keep it, and give it the time it needs to grow. The strategy relies on companies that increase their growth over time to produce substantial long-term returns. If you had invested Â£ 1,000 in Amazon when it went public in 1997, for example, you would have enjoyed a return well over Â£ 2million by now. It’s the ultimate in long-term investing. Remember that past performance is not a reliable indicator of future returns.
There are other advantages to the strategy. Most of us don’t have the time or inclination to constantly monitor our portfolios. Choosing a stock with the intention of holding it forever is a sure way to keep your investment hassle-free.
Not everyone is convinced. Some would say that this approach is based more on luck than skill. Investing in Amazon in 1997 sounds good, but back then the company was nothing more than an online bookstore. No one could have predicted what would become of him.
Are they right? Is the idea of ââa permanent stock too good to be true?
I spoke to a few experienced fund managers to get their perspective.
What is a âforever stockâ?
Among the four managers I spoke to, there was one thing they all agreed on: âforeverâ is too long.
Fund managers like to feel in control of their environment. Since they don’t know what the world will look like over a period of decades, they are unlikely to be able to determine the value of a stock this far into the future.
The markets are often dominated by the prevailing trends, and these can be difficult to predict. Right now, the US tech giants are leading the pack. Ten years ago, it was the oil majors. Now, as we move towards a more sustainable future, the longevity of energy giants like BP and Exxon (once the world’s largest company) looks uncertain.
As Aruna Karunathilake, manager of the Fidelity UK Select Fund, tells me: âThe forces of creative destruction usually impact all businesses in the very, very long term. If you look at the makeup of the Dow Jones or the FTSE 100 a hundred years ago, there will be very few survivors now. “
It became evident at the start of my conversations with professional investors that the idea of âââforeverâ should instead represent the lesser ambition of something well above an average holding period. We settled around the 20-year mark to own a stock âforeverâ, and that’s where things got interesting.
Are permanent actions a good idea?
“Nonsense” – this is the verdict of Leigh Himsworth, manager of the Fidelity UK Opportunities Fund.
For him, this approach means “investing in faith rather than in the real facts”.
Julian Fosh, manager of the Liontrust UK Growth Fund, is more tolerant of the idea. A key tenet of his investment style is to “find companies that present barriers to competition”. Julian is happy to hold stock as long as these barriers remain durable.
He says: âThe key for us to decide whether a business can be considered a long-term asset or a ‘forever stock’ is the extent to which it can maintain barriers to entry, maintain profitability and worsen this. growth to deliver excellent long-term performance. term returns.
The problem is, it’s very difficult for companies to do these things “forever”, and even harder for investors to identify the privileged few who will. As Jeremy Podger, manager of the Fidelity Global Special Situations Fund says, âCompanies that constantly reinvent themselves, separate themselves and grow again are rare. “
It’s tempting to assume that the stocks that have the best chance of doing this are the best performing today. However, their continued success is far from certain. Track the performance of major stocks from 20 years ago and their positions today are likely to represent a sharp drop from grace. Likewise, if you invest in Amazon or Apple now, you expect them to replicate the performance of their past decades over the next. It is quite the demand.