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.

As most of you know, I’m a big advocate of the “buy and hold” strategy of investing. And, actually, I really like the “buy, hold and dollar cost average to your position” strategy.

Well- if you had bought Pfizer (PFE) at any time in the last 8 years, that strategy has gotten you nowhere. In fact, it’s losing you money nearly every single year. Even if you’re dollar cost averaging.

A Marketwatch columnist discussed in April 2008 a few of the most recommended stocks by newsletter editors:

With that thought in mind, here are the stocks that, as of a Sunday-evening deadline, are most popular among the nearly 200 newsletters tracked by the Hulbert Financial Digest. Notice that GE remains most popular, despite Friday’s carnage:

Company Ticker # newsletters recommending

General Electric Co. GE 21
Johnson & Johnson JNJ 18
Apple Inc. AAPL 15
Pfizer Inc. PFE 14
Microsoft Corp. MSFT 14

Why is Pfizer still among the most recommended when its returns have not only just been bad, but been dismal?

Here are the grim stats:

1. The stock has been down three of the last five years.

2. The stock is down 15.36% year-to-date.

3. Total 3 Year Return: down 10.01%

4. Total 5 Year Return: down 8.40%

Was this a good investment?

If you had invested $1000 on January 1, 2003 and reinvested all dividends, you would have $809.80.

Pfizer just hit an 11 year low. And it continues to slide.

This stock is one of those that just slowly eats away at your investment instead of turning down, say, 15% in one or two sessions. You might be apt to sell it if it sold off suddenly. Instead, it slowly declines and all the while investors “hope” for that turnaround.

Is Pfizer cheap?

But maybe you should now be adding to your position? Right? Maybe Pfizer is a “value” stock?

Here are its stats:

1. P/E is 16.82

2. P/S is 2.70%

A P/E of 16.82 is NOT cheap. In fact, that wouldn’t even qualify as “value” by most value investing stock pickers who normally look for companies whose P/E is below 15.

And to top it off, Pfizer isn’t even growing. Yes, they are paying a big dividend of 6.90%. But you can invest in other companies that actually have a growth plan for the future with a similar dividend.

Conclusion:

Pfizer is NOT a hidden gem. It’s not a deep-value stock that the market is ignoring.

It’s just slowly eating away at your investment.

Attention all newsletter writers: It’s time to change your tune on Pfizer.

There are far too many good companies to invest in out there to bother with Pfizer. Someday, it really WILL be a value pick. I’ll let you know when that happens. Given the slow bleed, we’ll all be waiting awhile.

Remember the movie “Invasion of the Body Snatchers” where the Alien life force is replacing the humans with exact replicas- except something is just a bit “off”? The movie was re-made three times (based on a book) so there must be something to it.

Who can forget the Pod People?

Jim Cramer= Pod Person

Have you seen Jim’s latest book? It’s called “Stay Mad for Life: Get Rich.” I skimmed through it recently in the local bookstore.

It espouses:

1. Buying stocks of a select group of companies and holding them for a long time after you’ve done your homework on them

OR

2. If you don’t have time to study your investments, buy index funds.

WHAT????

Wasn’t it Jim Cramer who said: “Buy and hold is for morons”?

If it wasn’t him, then I apologize. But recently he did say this in response to an article by Paul Farrell on Marketwatch.com that attacked his show and methods:

If anything, buy and hold is a completely reckless and irresponsible strategy. This is why I have always preached “buy and homework.” There’s nothing wrong with buying a stock with the intention of owning it for years, as long as you’re willing to check up on that stock every week to make sure that your thesis for owning it hasn’t fallen apart. Too often people regard buy and hold as a license to pay no attention to their investments and hide their heads in the sand when things turn sour. How many nuclear utility stocks did our parents own mindlessly with buy and hold? How many Enrons and WorldComs and Webvans and eToys.coms were bought and held? Don’t be silly, Mr. Farrell: You are the reckless one.”

Yes- all buy and hold investors should beware because their company could, gasp, be Enron. Or, even worse, Webvan.

Recently, Businessweek wrote about the “new” Cramer.

Most people actually won’t get rich by buying individual stocks, Cramer says. Unless you do your homework, namely spending an hour a week researching for each stock you own, “You won’t beat the market, and you’ll probably lose money,” he writes.

Times have changed, he writes. Now, partly due to new regulations on how much information executives can reveal to fund managers, “trying to game short-term movements in stocks (is) almost impossible,” he says.

Wait a minute. Buying and selling every day (or week) won’t make you rich? Jim, you’ve been lying to me for years! I feel so betrayed.

But it gets better.

To advise readers and viewers to trade short term, Cramer says, is like telling them “you too can play in the NBA.” A few might be able to do it, but the vast majority won’t. “I’ve evolved to the point where I see the daily struggle that people go through to just put away $100 a month,” Cramer says. It’s a more realistic approach. “I wish I wrote this book first,” he adds.

I congratulate Jim Cramer on figuring out one thing. Not everyone is a hedge fund manager with millions to invest. Most of us do have simply $100 a month. Trading on the dips is unrealistic with $100 a month. The buying and selling fees will eat up too much of our investment to make it worthwhile. The only strategy we have is “buy and hold.”

Welcome to our world Jim.

One thing we can agree on is: stock investing is still the way to get rich. Even if it’s on $100 a month. And even if it’s a buy and hold strategy. Just ask all of those little old ladies who have their Exxon or GE stock. Nothing wrong with that.

Nope, Buy and Hold isn’t for morons.

Did your parents buy shares of Philip Morris in 1945?

Do you have an 80-something aunt who still owns shares of Ford from when her father worked there in the 1930s?

Did you buy shares of Home Depot in 1985 because you lived in Atlanta and loved the stores?

Did you buy shares in McDonalds in the 1970s because they “just loved” those cheeseburgers (and so did your kids?)

You know who you are.

Don’t be shy! I’m looking for people with buy and hold stories to share. 15 years, 20 years, or 50 years. How long have you owned?

Tell me your stories! I want to hear all about it. The triumphs: Philip Morris (the most successful stock in the S&P 500 since 1957). And yes, the tragedies: Ford, GM, the airlines stocks (most have NOT done well since 1957.)

Be proud of being a buy and hold investor. It takes guts and patience.

Contact me using the contact form on this site or e-mail me at tracey@traceysmarketupdate.com.

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