Establish a Sound Investment Philosophy 55costs — commissions, taxes, fees — will eat into your profi ts. Nothing
is more valuable or sought after than a wonderful business that can
deliver returns year in and year out. These investments allow you to
sit back and enjoy the ride.
However, the concept of buy and hold is not without its cave-
ats. The most crucial one is the starting point of the buy process.
Whenever you hear any serious investor advocate the concept of
buy and hold, take the phrase a step further to mean buy at the right
price and then hold. In value investing, the stock price is of extreme
importance when entering and exiting an investment. When prices
indicate that a good business is cheap, use it to your advantage to
make a good investment. Conversely, when prices indicate that
business values have exceeded intrinsic value, use the opportu-
nity to sell the overvalued business and once again buy an under-
valued business. At any other time, the stock price fl uctuation is a
distraction.
To appreciate the signifi cance of why valuation matters in
choosing the right starting point, consider the 17 - year period
from 1964 to 1981. Had you bought the stocks in the Dow Jones
Industrial Average at the beginning of 1965 and held until 1981,
your returns would have been nonexistent. During those 17 years,
the Dow Jones started and ended at the same point. At the begin-
ning of 1965, the Dow stood at about 875 points. Seventeen years
later, the Dow was at 875. A buy - and - hold approach over that
period would have effectively delivered a zero percent return — a
negative return when you factor in decline in purchasing power
over that period.
Seventeen years is a signifi cant amount of time. For many inves-
tors, it represents the bulk of their investment years and is certainly
a long enough buy - and - hold period. Interestingly, the period from
1982 to 1999 turned into one of the greatest market periods in
American history. The Dow Jones advanced more than tenfold, andCH004.indd 55CH004.indd 55 9/2/09 7:06:50 PM9/2/09 7:06:50 PM