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.

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Otherwise, the interior stores were rather sparse. (But the mall was recently bought and an extensive rehab is planned which could explain the scarcity of stores.)

But one booth in an empty store caught my eye.

Two men were sitting at folding tables and buying gold.

And two women were selling.

They had scales and were giving out cash for necklaces, rings, earrings etc. Anything with gold in it.

I didn’t ask how much they were paying (I wish I had.) Gold is currently selling at $931 an ounce, but, of course, these dealers would have been buying for much, much less.

But still. If you can get a couple of hundred dollars for selling some gold necklaces you hardly wear, why not?

That’s the difference between gold and the dollar. Gold actually has real value and people are willing to pay for it. If you have gold, as has been true throughout all of history, you can barter it, sell it, or use it as leverage. There’s a reason the explorers came to the New World looking for the much rumored “city of gold.”

Is this a bullish sign for gold?

I don’t remember the last time gold dealers were buying gold in a shopping mall. But clearly, the high gas and food prices are taking a toll.

More on Southwest Michigan and its economy tomorrow.

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Have you heard about it?

I thought not.

Even though many people are invested in international stocks- apparently not enough care about Chinese stocks.

This isn’t just a “bear” market - which normally is a 20% fall. This is a red alert crash.

Surprisingly, Chinese investors aren’t panicking. That’s mainly because the Chinese government has, in the past, stepped in to prop up the markets and so Chinese investors are conditioned to expect it this time. But with the markets down nearly 50%, what if the government doesn’t step in?

From the WSJ:

Beijing already has taken several steps this year to try to bolster market sentiment. In an effort to calm fears that a flood of new shares would dilute already weak prices further, it announced on April 20 stricter limits on the sale of a large category of stock that was becoming newly tradable. Three days later, it cut a tax on stock trades to 0.1% from 0.3% — after having raised the tax in May 2007 to try to calm a market that was then soaring.

But the effect of both moves was limited and short-lived, and stocks have continued to plunge, as investors worry about the impact of a global economic slowdown as well as Beijing’s own efforts to tamp down surging inflation. The Shanghai Composite had its worst single-week drop in 12 years this month, falling 13.8% in the week ending June 13. On Monday, it closed at 2760.42, down 2.5% on the day and down 55% from its record close in October.

“The government’s interventions in the last six months have not had any lasting impact and, by encouraging investors to second-guess official intentions, they may have increased volatility,” Mark Williams, an analyst from Capital Economics, said in a June 8 report.

In the US- such government “intervention” is called the “plunge protection team” by some people- a mysterious group of government officials who are supposedly tasked with keeping certain asset classes propped up. (This is all “allegedly”, of course. Whether or not the “plunge” team exists remains to be seen.)

Still- a 50% decline in any asset class is scary. Even if the Chinese government does step in soon, the losses are real.

But it’s nice to see there’s no panic among investors. What would happen to the Shanghai Index if a true panic gripped their market?

I shudder to think. It’s already down 50%- can anyone say 75% decline? 80% or even 90%?

Shudder…shudder…

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In 2005 she said:

“If you truly want a one-fund solution, I would recommend investing in a “total” stock market index or an “extended” market index. These funds own an even wider array of stocks than the S&P 500, which is focused on large established companies. The broader total and extended market indexes also hold mid-size and small stocks; it’s a great way to get exposure to all strata of the U.S. market.”

But recently, Suze Orman has changed her mind about what you should be investing in.

Now, she says, index funds are “out.”

You should be actively managing your own money. From June’s Money Magazine:

Q. You used to be a big fan of index funds. Now you’re not.

A. I know, I know. I’m switching for the first time in my life. All the stats say that index funds outperform 80% of managed funds out there. And a few years ago I’d have said just buy Vanguard’s S&P 500 index fund or its Total Stock Market index fund.

But today I think you have to be more active, and I like exchange-traded funds that let you own particular sectors, like iShares MSCI Emerging Markets, United States Oil Fund or the Metals & Mining SPDR.

Q. Oil and mining? You obviously aren’t worried that commodities are the next bubble.

A. No. I think it’s absolutely possible you could see oil go to $150 or $160. I’d never tell you to put 100% of your money into anything. But I think in this economy you need to manage your money more actively.

Suze Orman is admitting Wall Street’s dirty little secret: in bear markets, index funds don’t work.

If you invested $1000 into the S&P 500 index in March 2000, when the NASDAQ was peaking, by April 2007, it would have been worth less than $1000 (all dividends reinvested.) You would have lost money in those seven years.

And your return isn’t that much better if you continued to hold it until 2008.

The SPY (the S&P 500 Index) is down 9.32% through May 31, 2008.

Its one year performance is down 5.28%.

Over the last three years, you actually gained 5.73% a year. Not awful, but not stellar either.

No wonder most investors keep saying, “you can’t make money in the market.”

It certainly seems that way- if you’re in the index funds.

That’s why Suze Orman is saying to get out of the broad indexes. In a bear market, only certain sectors will outperform. In order to get larger returns, an investor has to figure out what those are and invest more strategically in those sectors.

That’s why stock picking becomes key in bear markets. Because, as Jim Cramer always says, there is always a bull market somewhere!

Heed Suze Orman’s advice: invest some money in specific sectors- instead of the broad market. In bear markets, indexes get mauled, but your portfolio doesn’t have to.

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