Buy & Hold Style of Investing

Warren Buffett was once asked what his preferred holding period was when he bought stocks. His short answer? "Forever".

This one word represents the essence of Buy & Hold Investing. Investors who practice this strategy prefer to buy shares of blue chip companies at cheap valuations, which typically occurs when they pass through a difficult phase, and essentially hold the shares for as long as possible. During the long holding period, investors reap returns from multiple sources. More often than not, blue chip companies have high dividend yields, which may be reinvested in the stock. Secondly, as the company's earnings continue to grow, the stock price follows earnings. Thirdly, companies sometimes undertake stock buybacks, when they feel that the share price undervalues the company.

All of the above, deliver long term returns to patient investors. However, one must be aware that this is not the route to quick riches. Returns in buy and hold investing come from patiently holding stocks for many years and allowing the returns to compound.

However, the potential wealth that can be built through this style of investing is nothing to be sneezed at. For an example of this, the story of an American women known as Grace Groner is instructive.

Grace Groner worked as a secretary in Abbott Labs for over 30 years till he retirement, and earned a modest salary from this. She lived in a frugal way, and never engaged in any ostentation. When she died, she willed her estate to her alma mater. To everyone's surprise, including people she had known for many years, the estate amounted to over 7 million dollars. The source of her fortune? A decades old investment in shares of Abbott Labs, which had compounded over many years. Her original investment was just $ 180 (i.e. 3 shares of $ 60 each). Over 75 years between 1935 and 2010, her investment (including reinvestment of dividends, and many splits, bonus issues, etc by the company) had returned her more than 15% p.a.

As I said, the kind of wealth that Buy & Hold Investing can generate is nothing to be sneezed at.
The key is to identify blue chip companies which one strongly feels will survive for many years to come, and continue to generate earnings growth for many years. Warren Buffett purchased shares worth $ 10 million in The Washington Post company in 1973, through his investment company Berkshire Hathaway. Today that investment is worth over $ 1 billion, and generates annual dividends greater than the original purchase price of the position. If anyone knows of such examples in India, please write in to me @ my email address listed below.