Buy and hold or trade?
The historic record has "buy and hold" the winner by a long shot
Between 1974 and 1976 I was a Master of Business Administration student at University of Western Ontario business school (now called the Ivey School of Business). One of my classmates, Dave Dixon, in 1986 sent me a “red herring” for a company called Microsoft which was planning its initial public offering (“IPO”).
By 1986, I had been a McKinsey & Company, Inc. associate, a Vice President of Canadian General Electric Company Limited, and at the time was President and Chief Exective Officer of The Enfield Corporation Limited (“Enfield”). I founded Enfield on April 6, 1984 and in the year ended June 30, 1986 Enfield earned over CAD$25 million as a new public company having completed its IPO earlier that year.
I read the Microsoft preliminary prospectus, gave it some thought, and passed. I had no idea what DOS was, and was using a Xerox 6085 workstation running on the Unix operating system. I thought Microsoft was a company was going nowhere with IBM a competitor in the nascent personal computer software industry. I was wrong. Dead wrong.
Microsoft priced its IPO at US$21 a share and by close of trading on the IPO day had hit US$35, giving the new public company a market capitalization of almost US$800 million. Today, Microsoft has a market valuation of over US$2 trillion. Talk about missing the boat. Anyone who bought a board lot of MSFT on the IPO for US$2,100 or bought a similar sized position in the secondary market for US$3,500 would be a multimillionaire today if they just followed a “buy and hold” strategy.
The same is true for Amazon.com, for Apple, for Google (now called Alphabet, a silly name in my opinion), for Tesla, for Facebook (now called Meta, another silly name) and for many other companies. Huge fortunes are made by buying well and holding for long periods. Sure there are failures but trading is a mug’s game.
As a set, traders lose money. Gains by one trader are at the expense of losses by another, and the trades attract commissions, fees and tax consequences. Investors as a set make money in stuttering steps over time as the set of public companies continues to earn profits and pay dividends. The value of those companies is not the trading price their shares but the present value of their stream of dividends in classical valuation theory and the future value of the cumulative dividend stream in economic reality. The accumulation of wealth cannot be accomplished through trading except for a few lucky traders who are analagous to gamblers at the Casino who hit the jackpot.
Public corporations on average earn about 12-15% after tax return on equity and have done so for decades. Buy and hold investors who buy shares close to book value enjoy similar returns and those who pay a premium to book value a bit less. Building a portfolio of economically viable businesses that can grow at rates more or less in line with general economic growth or better will produce superior returns over time. Buy and hold is boring, devoid of the fun of today’s news driving prices up or down and having something exciting to discuss at cocktail parties. It is simply a way to get rich for patient investors. Warren Buffett, John Templeton, Stanley Druckenmiller, Peter Lynch and Benjamin Graham (and a host of others) saw the potential and became wealthy with a boring, long-term approach to investing.
Today, there are companies with long histories of profitable operations trading at singe digit multiples of current earnings, paying dividends and at relatively low risk of corporate failure.
Here are three I am buying in small quantities while keeping a sensible cash reserve to benefit from potentially even lower prices in an expected recession.
Canadian Imperial Bank of Commerce (CM.TO) trading around $55.00 a share, very close to book value.
Enbridge (ENB.TO) trading in the low $50’s and yielding about 6%
Peyto Exploration & Development (PEY.TO), the lowest cost Canadian producer of natural gas, currently yielding over 10%