Wall Street is currently full of companies who have caused substantial emotional and financial pain to stockholders. Just consider the following case studies.
General Motors
According to The Wall Street Journal, “General Motors Corp.s’ shares sank to a 53-year low Thursday on concerns about liquidity, equity dilution and a potential dividend cut, heightening speculation that the auto maker doesn't have enough cash to finance its turnaround.” That means, that had you bought $10,000 worth of GM stock back in 1955, your position would be worth exactly the same – and that doesn’t factor in that due to inflation it would only have roughly $1,347 in purchase power compared to what you started with after the near lifetime of waiting! Of course, there would have been dividends along the way that could have made a very substantial difference, but only if they were reinvested. This is a perfect example of a company that, due to its cyclical nature and feast-and-famine fortunes, could make someone very rich if they were adept at trading it professionally, but is not something you’d want to form the foundation of your family wealth.The lesson from General Motors is that the employees, through pension and health benefits, ended up effectively owning the entire business. Management, urged on by lax accounting rules that didn’t require any current sacrifice for making far-off retirement promises, bowed to union pressure and the result was a business with finite resources that could not meet the commitments that had been made. People that are urging for good, blue collar jobs to return to America comparable to the ones available at the time from businesses like GM don’t realize that improved accounting rules make it almost virtually impossible, even without globalization, that a transfer of wealth even remotely comparable to that which occurred at the automaker could ever happen again. Without realizing it, the employees became the de facto stockholders, with much of the benefits without the drawback of seeing their equity fluctuate every day, which would have led some to inevitably panic and sell. The circumstances were unique and not likely to repeat themselves ever again.
Pfizer
The pharmaceutical company is one of the best returning investments of all-time and currently sports a roughly 7.5% dividend yield, yet the stock is trading at a 10 to 11 year low. Why? Among other things, some analysts and shareholders appear to be worried that much of the firm’s available cash is held overseas and was generated from international operations, meaning that if they had to ship it back home to pay the high dividend, it would suffer massive tax levies as the money was repatriated to the United States. As this would destroy wealth, rational management should never allow that to happen to the only wise course of action would be to lower the dividend until domestic operations were able to grow sufficiently. The specter of a dividend cut, coupled with the reliance of Pfizer on a handful of key drugs, has pushed the share price of this once royal blue chip to its current bargain basement thrift-store price.Now, unlike General Motors, there is a good chance that the underlying business of Pfizer could be attractive in the right managerial hands and under the right circumstances. Given the reinvested dividends, a shareholder could have done well compared to the S&P 500 over the long-term so the two situations aren’t comparable. Personally, I’m a fan of Johnson & Johnson due to the diversified operating model that includes not only pharmaceuticals but medical devices and consumer products, including a group of companies such as Listerine that JNJ purchased from Pfizer not that long ago.
Kodak
Up until a recent tax ruling that gave the shares a boost, Eastman Kodak stock had been trading near 40 year lows. Anyone who looked to the digital revolution, with HP printers (among other brands) delivering fantastic quality photographs on specialty paper from the privacy and convenience of your own home should have realized that this pioneer in film technology was going to have some extraordinarily difficult times ahead unless it could figure out how to leverage its world-famous brand name and make inroads in the market.Again, this doesn’t mean that the stock can’t be a successful trade or short-term holding that can make you a lot of money. It’s just to say that film isn’t as inevitable as chocolate bars, chewing gum, or a can of Pepsi or Coke.
What Does This Mean for Buy and Hold Investors?
At the heart of the matter, intelligent investing comes down to the price you pay and the future direction of the underlying business profits. Had you bought Coca-Cola for 70x earnings a decade ago at the height of the stock market frenzy, it was perfectly evident that you weren’t going to have a satisfactory experience.The bottom line: Buy and hold can be just as foolish as day-trading if you aren’t paying attention to the health of the business. Imagine if you had bought and hold a whip-and-buggy blue chip stock once the automobile had been invented? Don’t be an ostrich and stick your head in the sand. Your retirement and wealth are too important.
