Sometimes it’s best to do nothing

A week or so ago, I read an article in The Wall Street Journal that provides a great lesson to all investors:  Buy good businesses and then just hang on.  Do nothing.

I’m smiling to myself, because I’m pretty sure I can guess what you’re thinking:  “Heard this story before, Alan.  Buy and hold.  Be patient.  Value investors are in it for the long term.”  And you’re right.  You have heard it before; and you’ll hear it over and over again, for one simple reason:

Quoting from the story’s headline, “It’s a recipe for success”.

To prove his point, Randall Smith, who wrote the piece, uses the ING Corporate Leaders Trust as an example.  The 22 stocks in this $750 million dollar portfolio are all descended from a portfolio that was chosen in 1935 — specifically set up so the stocks wouldn’t be traded, except as a dividend elimination, a debt default or a downgrade.

In describing the fund, Morningstar Inc. analyst, Kevin McDevitt, said “The fund takes passivity to a level that would be intolerable to most investors; and, he added, “it has thrived for 75 years on chronically low expectations for its old-economy holdings.”

About a third of the original stocks remain, some have morphed into different holdings and some have fallen by the wayside.  And while it’s true that the fund has trailed the market at times, over the last decade it returned an average of 8.3% a year — better than the S&P’s 5.3% and superior to its peers’ average of 4.7% in Morningstar’s large-value category.  And during this same period of time, some company’s shares tripled!  All of which points to another important lesson for all of us:

Everyone has some losers — a fact that every investor just needs to accept.  But it is still important to hold on and wait.

Another example of this strategy can be found on my own website, where I write about Grace Groner, the Chicago secretary who bought 3 shares of Abbott Laboratories stock in 1935 and left a $7 million dollar estate when she died in 2010.  Sure, compounding had a lot to do with it — but so did the fact that she hung on to those shares for 75 years!

The principles of value investing are sound.  And while it is always a good idea to remind ourselves of what we stand for, it is critically important during the uncertain times in which we now find ourselves.