Ask the Fool | Buy to Hold

Q: Is "buy and hold" the best investment strategy?

A: There's no one-size-fits-all investment approach. Buying and holding has worked wonders for many investors, but it's best thought of as buying to hold. In other words, never buy a stock and then just blindly hold it for years without ever checking up on it. Instead, carefully select promising companies, intending to hold them for the long term as long as they remain healthy and growing.

Many great fortunes have been built by people who held shares of great companies (such as Wal-Mart, Microsoft, General Electric and Coca-Cola) for decades, through ups and downs. Even super-investor Warren Buffett has said that his favorite time to sell is "never."

Q: If I buy 100 shares at $10 each and the company does a 2-for-1 stock split, how do I value the shares when I sell?

A: Let's say the shares you bought for $10 were trading at $16 before the split, for a total value of $1,600. After the split, you'll own twice as many shares (200), worth half as much ($8 each), for a total of . . . $1,600. See? Not much has changed, materially. For tax purposes, though, the "cost basis" of your purchase, which was $10 pre-split, is now halved, dropping to $5. So if you sell now, your capital gain will be your $1,600 in sale proceeds (less your brokerage commission cost), minus your $1,000 purchase price (plus your commission cost). Including commission costs is legal and will reduce your taxable gain a little. Lots of numbers get adjusted when splits happen - these include dividends per share, earnings per share and other figures based on share count.

Fool's School | Philip Carret: 70 Years of Success

If you'd like guidance from someone who invested for 70 years and beat the market average soundly, meet Philip Carret. He started Pioneer, one of the first mutual funds, in 1928. His average annual return, calculated from 1928 to 1974, is estimated to be 14 percent. That's pretty impressive, considering that the stock market in general averages only a 10 percent annual return. Carret died in 1998 at age 101, leaving behind many thoughts on what contributes to successful investing:

  • "Never borrow money for speculation in stocks. When you do borrow, do so sparingly, and only when rates are low or falling and business is depressed."

  • "Never hold fewer than 10 stocks covering five different fields of business."

  • "More fortunes are made by sitting on securities for years at a time than by active trading."

  • "Reappraise every holding at least every six months."

  • "Be quick to take losses, reluctant to take profits."

  • "Avoid inside information as you would the plague."

  • "Diligently seek facts; advice, never."

  • "Keep at least half [your investment portfolio] in income-producing securities." (This would include not only bonds, but also dividend-paying stocks.)

  • "Never put more than 25 percent of (your investment portfolio) into securities about which detailed information is not readily and regularly available." (We'd suggest that you avoid these securities entirely.)

Other lessons can be gleaned from Carret's life. It wasn't one spent with eyes glued to the stock ticker. He made time for things he enjoyed, such as solar eclipses, which he would travel almost anywhere to observe. He was generous with and loyal to friends. When he prepared his housekeeper's tax return for her, he quietly paid the taxes due, as well. He was a man of principle. Years ago, when a social club at Harvard agreed to accept him on the condition that he "lose his Jewish roommate," Carret told the club to take a hike.

Carret's example inspires us to aim for high performance, high principles, and lives with many high points.

Foolish Trivia

I trace my roots back to an 1868 trading company. Today, I'm reportedly India's largest conglomerate and its biggest taxpayer, operating the country's largest private steel company, its largest chain of luxury hotels and its largest private power utility. I also deal in vehicles, software, food, telecommunications and more. I have 96 operating companies (several dozen are publicly traded) and 230,000 employees, and rake in about $22 billion annually. Two-thirds of me is owned by a charitable trust, and I introduced eight-hour workdays in 1912. My name is one way to say goodbye. Who am I?

Last Week's Trivia Answer: You probably don't know my name, but I'm the largest, most productive and most profitable steel producer in the United States, generating more than $14 billion in sales annually. Based in North Carolina, I'm also the country's largest recycler, processing millions of tons of scrap steel each year. I trace my roots to the founder of Oldsmobile and later to the Nuclear Corp. of America. I'm an amazing success story, having retooled myself after facing bankruptcy in 1964. My products include carbon and alloy steel, steel joists, cold finished steel, steel fasteners and light-gauge steel framing. Who am I? (Answer: Nucor)