Buy and Hold Can Decimate your Stock Gains

One thing I’ve seen a lot online are people bragging about how much dividend income they have coming in or how they are beating the market.

I think it is always good to keep a historical perspective. Something that’s escaping confident investors:

Over the long-term, the majority of stocks underperform T-bills as an investment.

A great deal of stocks produce no or negative return over the long-term

I personally see such statistics as a good reason not to buy and hold stocks. No matter how many famous investors state it, I just think buy and hold is a bad strategy (Unless we are talking Index Funds). Very few stocks are worth buying and holding long-term. I personally believe the longer you hold individual stocks, the riskier they become. The more apt the business starts fading and doing something wrong. Not to mention, larger businesses can only grow so much. Furthermore, at some point, every investor wants to hop on the train, and the stock becomes highly overvalued. You’ve seen this recently with Tesla.

I think going forward, many of the companies that have outperformed (Apple, Google, Amazon, etc) will actually underperform the market. That’s also what history has shown- Once companies make it into the top 10 market cap, they at some point begin to underperform. Currently, people are seeing lower (but not low) PE values on some of these Top 10 stocks and loading up the truck….I hope it works out for them.

We also know that stocks that outperformed over the last five years, often go on to underperform the next five years. I’ve got a few of these in my own portfolio that I worry about (FTNT, MRTN). At some point FTNT will no longer be producing 40+ CAGR, lol. I think knowing WHEN to sell is the hardest thing in the world.

On the other hand, somewhere on this list there are stocks that will actually turn things around and beat the market over the next five years. They’ve done horribly the last five years, but their future is brighter.

Before you look at the numbers, understand the Returns for VTI were 10.40% CAGR over seven years and 9.97% CAGR over five years. This will put things into perspective-How much more wealth one could have had if they had just bought the index.

You will see that some of these stocks didn’t produce anything, in fact they were DESTROYERS of wealth. In particular, MMM , Stanley Black & Decker and Walgreens Boots Alliance. When people say they are buying these stocks for income, I don’t think they understand that the initial amount they put it, they might not actually get back. Dividends aren’t a guaranteed return. Dividends are not income if your total return is in the red, as nothing new in your pocket has been created.

Here are the seven and five year returns of some notable stocks. Yes, these are numbers with dividends re-invested. There are a few stocks on this list in my own portfolio (SPG, Alison Transmission, and recently BTI), I hope they do better!!

7 year CAGR5 year CAGR
Legget & Platt1.64%–1.30%
Medical Properties Trust5.86%4.97%
Stanley Black & Decker1.09%-10.06%
Simon Property Group.39%-.37%
Alison Transmission5.45%2.61%
Trowe Group7.38%5.34%
Cardinal Health2.56%8.49%
Bristol-Meyers Squibb5.55%6.74%

Look at a stock like Medical Properties Trust. Someone might be drawn to the big dividend. They’ll buy it and say-well at least I’m getting my dividend. Meanwhile, you knocked yourself out of almost double the returns by choosing that stock rather than VTI (or any other Total Market ETF). If you are retired and need the income, that’s one thing. It’s another if you are just trying to get the largest pile of chips you can.

There are some interesting stocks like Cardinal Health. This proves WHEN you buy (timing) is important. The 7 year CAGR is only 2.56%, but the five year is 8.49%. The more recent you bought, the better off you were. However, if you were holding the last ten years, it probably didn’t work out as well for you. On either timeline, it’s still underperforming VTI.

Fedex is a particular scary example. Imagine working at Fedex and part of your benefits is the stock. If you held 7 years, your return is almost as a T-bill from that time. You underperformed the market significantly. If they gave you stock within the last five years, you are actually NEGATIVE. By the way, I hold Fed-ex in my Brokerage account (The portions I gained 20% on, I sold off last month). I will continue to sell it off as it hits my target numbers. This is NOT a long-term hold for me, more of a swing-trade.

Stanley Black & Decker is my favorite example of why buy and old is horrible advice. I bought SWK in March of 2020 and I sold the majority of mine for over a 100% gain. Some I sold off as it went down (40-60% gain). Had I held on to the stock long-term, today I’d be NEGATIVE in the stock!!! A stock can go from a wealth doubler to a destroyer of wealth within the period of a few years, yet people will say BUY AND HOLD. I learned this lesson back in 2018 when I bought stock in American Eagle Outfitters, I was up 40% and then the stock started cratering and I had to sell for a loss.

The worst part about this is you have industry professionals like Warren Buffet saying things like-“I’d been better off if I hadn’t ever sold a stock I bought”….this gets misinterpreted by retail investors and they do just that. Then they wonder why they lag the market, or they lose money.

I know everyone’s situation is different. Many people refuse to sell because they don’t want to pay taxes. However, I don’t know about you, but I’d much prefer paying taxes than losing half my money because I did the ole BUY AND HOLD. In the case of SWK, it was in my IRA, so no taxable capital gains.

Disney is another one I saw redditors in particular loading up on. I’m not quite sure why they were so enthusiastic about DIS, looking at the long-term chart. It takes more than a few Star Wars films to make a stock go up, haha.

Disney has a 7 year CAGR of less than 3% (That doesn’t even keep up with inflation). The five year is much worse. You lost money in real terms investing in Disney. Not to mention the fact DIS had cut it’s dividend, so anyone depending on DIS for income no longer has it. A well known household name stock can be a terrible Investment.

TRowe’s seven year CAGR doesn’t look too bad-slightly above 7%. Yet, you still underperformed VTI. If you bought this stock as a dividend stock to produce “income”, you might as well have bought VTI and then later took the greater earnings and put it into a dividend stock (Or a bond right now). There’s nothing wrong with dividend stocks, but by picking a dividend stock are you going to leave a lot of money on the table? Depends on your goals-do you need the money today or tomorrow?

Personally, I like some of my dividend income TODAY as a self-employed person whose income fluctuates a bit. However, the majority of my retirement accounts are Index Funds. I want the highest capital appreciation in those accounts, perhaps some day I will turn those accounts into more dividend income portfolios as I reach retirement age (not sure yet).

There are so many stocks on this list I’ve heard Dividend Investors recommend, yet I do not believe they are aware what the REAL returns of these stocks are over the last 5-10 years. What opportunity cost you might be taking to invest in one of these individual stocks. These aren’t all of the stocks I looked at. Out of 60 stocks I analyzed, only 37% outperformed the market over the last five years. These aren’t good odds to choose an individual stock over an Index for money you need later.

One argument someone could make is that this analysis doesn’t represent real life. No one buys a stock on one day and never buys any more of it. While that is true, you can’t just look at that as a favorable thing. Go look at MMM or SWK. Suppose you got your dividends and you kept re-investing them at higher and higher amounts from your initial purchase. You’re actually worse in the hole. You see, many of these stocks got highly overvalued before they tanked, so the investor would be throwing good money after bad as the stock price climbed. Those shares are down even further.

Lastly, I fail to see how that makes much difference when the reality is they underperformed the market so bad. Anyone could have bought an Index fund (which pays dividends as well), re-invested those and came out light years ahead of any of these stocks.

Anyways, I’m not a financial professional. This isn’t advice as everyone’s portfolio and needs are unique. However, I do think it paints a good picture of how individual stocks can be horrible investments over the long-term. In many cases, the longer you hold them, the worse the returns get. Doubling down or dollar cost averaging down isn’t always the best decision. Sometimes you are better off taking the tax hit and selling. I will continue to challenge the idea of Buy and Hold (Even when my own stocks are up 30-300%). At some point, those stocks will stop performing and the money should go elsewhere.

I’m going to keep my opinion that holding stocks over 7-10 years is very dangerous business. The only thing I plan to hold that long are my index funds. Index funds have the built in mechanism to essentially pick the top winners and siphon off the losers by market cap. You’ll get market returns, but in many cases market returns beat what else you might get. 2% or even NEGATIVE.

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