When Buy and Hold Doesn’t Work: General Motors

Many investors have invested diligently in General Motors (GM) or Ford (F) over the years (especially those that worked for either company.)

And now, sadlyl, you have nothing to show for it.

Why didn’t buy and hold work for these companies? Does that mean buy and hold never works?

A lot of buy and hold skeptics look at GM and Ford and say, “see- this is why you shouldn’t buy and hold.”

But buy and hold DOES work- if you own companies that are growing their business. How long ago was it when either of these car companies actually made money off of building cars?

General Motors was profitable earlier in this decade because it owned a big lending unit, GMAC, that did, among other things, home loans. But GM hasn’t made money off of its actual auto business in years.

The company hasn’t made money at all since 2005. And they won’t in 2008 (given the current economic conditions.) That is four years of losing money. Who wants to own a company that never makes a dime?

Is that the kind of company you want to own for the long haul?

You Must Stay Vigilent

Buy and Hold doesn’t mean you buy and walk away without ever checking to see if your companies are still sound investments.

Warren Buffett has said that the best time to sell is never- UNLESS- company fundamentals have changed. Either the company is no longer competitive in its industry, the management is flawed, or it has changed its focus (i.e. it used to sell cars but now bundles home mortgages.)

The signs have been there for over a decade with the American automakers. Yet, understandably, it’s still hard for longtime investors to see that the company is going the wrong direction.

Don’t Let the Dividend Suck You In

Many investors, especially in GM, got lulled by the heafty dividend the company has paid over the years. It has only cut the dividend twice- in 1992 and just recently in 2005. The 2005 cut was 50%. It’s likely they will be cutting it again soon- given the outflow of cash they are burning through every month as car sales plunge.

Right now, GM is paying a yield of nearly 9% (which may or may not be safe.) Many investors look at that and think, “at least I’m getting something.”

The stock is down 70% in the last year. Is that really worth a now 9% payout? There are plenty of other financially sound, and growing, companies that are paying close to the same dividend.

Remember: Buy and Hold isn’t a license to walk away from your investment.

What does McDonald’s do? They operate hamburger restaurants. What do they make all of their money from? Their restaurant business.

What does Phillip Morris do? They make cigarettes. What do they make all of their money from? Selling cigarettes and other tobacco products.

What does General Motors do? They make cars. What do they make all of their money from? They don’t. (And before spinning it off- they made their money off of home mortgages and other loans.) But they’re a car company, right?

It seems obvious, doesn’t it?

Buy and hold can work if you’re buying great companies with earnings growth.