Buy and Hold Part II July 10, 2019July 11, 2019 Earlier this month I posted about the guy who sold 10% of Apple, now worth $90 billion, for $800. With hindsight, he should have held on. Likewise, the contract itself — a “historic document” of sorts that he sold for $500. It later fetched $1.59 million. You may have noticed that that post was uncharacteristically — some might say blessedly — short. Had I turned over a new leaf? No. A mini tornado had turned over my Internet tower. I had planned to add the obligatory paragraph about Warren Buffett, and some stuff about stocks, but suddenly I was on a forced vacation. So: Warren Buffett has been compounding the value of his shares at around 20% since 1965. Each $1,000 you invested in 1965 would have grown to nearly $20 million today — if you had simply bought and held. But say you had sold the shares at the end of each year and then bought them back. (No one would have done that; but lots of people do trade in and out of stocks all the time, chasing their dreams.) And let’s say federal and state taxes would have eaten 25% of each year’s gain . . . so that instead of compounding at 20%, your money was compounding at 15%. Each $1,000 would thus have grown not to $20 million but to $2 million — a tenth as much. Granted, the $20 million would be subject to tax if you ever did sell it (unlike the $2 million, on which taxes had been paid along the way). And granted, taxes are not levied on trades within a retirement account, if that’s where you hold your stocks. Still it’s a point worth making. And even in an IRA, while there’s no headwind from taxes, there’s still a breeze blowing against you in the form of the brokerage commissions you explicitly incur and the “spreads” not shown on your confirm but no less real. (If you go to buy a stock that’s $3.68 bid, $3.70 asked, the “spread” is 2 cents, or, in this example, about half of one percent. Trade in and out once a month and it mounts up.) Of course, it doesn’t always work to buy and hold. Lots of stocks go to zero and then disappear. I have an empty drawerful. (Empty, because they’ve disappeared.) “Cut your losses and let your profits run” is the mantra that apparently serves some people well. I’m just not wired that way. If it seemed to be a decent value at $10, as some people thought YTRA was when I first bought some shares . . . and if another company recently flirted with acquiring it at $7, as this one did . . . perhaps it was an even better value when I first suggested it to you at $4 . . . and slightly better still yesterday at $3.70, where I bought some more. SPRT is taking forever, down significantly from where I suggested it . . . but, again, I’ve bought some more. Some call this the “catch a falling knife” method of investing, and I want to stress that they are often right. For example, the PRKR I bought around a dollar is now around a dime. The market has given up on it — most likely rightly so — but so had the market once upon a time given up on Audible.com that subsequently rose 20-fold and on the Boise Cascade warrants you could have bought for 2 cents and sell years later, when the stock recovered, for 50 times as much. Most of the money you decide to allocate to the stock market should be in super-low-expense index funds or ETFs. But it’s not crazy, as I’ve suggested before, to carve out 10% or 20% of that money to play with the kinds of stocks I’ve suggested here. The disasters (PRKR) can at least be taken as tax losses (buy more at a dime, wait 31 days, then sell the shares you bought for $1?). The big winners, if any, and if held for more than a year (our quintuple in FANH?), can be used to fund your charitable giving via the Fidelity Gift Fund or one of its competitors. So think about it: If you do badly with this 20%, at least you will be matching the overall market with the 80% you have in index funds — and that’s better than most investors do. If you do well with this 20%, well, hot dog! And if you merely break even, you come out ahead after taking into account the tax advantages. Plus, for some of us, at least, it’s fun — and keeps us from less productive gambling, like the lottery. Or gambling.