Smarter Money: Tough Love for Your Portfolio

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The other day I met a portfolio manager who bought and held Winstar(WCII Quote). At the same gathering, I met an individual who bought and held Merck(MRK Quote). The portfolio manager realized that he should have sold Winstar instead of averaging down. The wealthy individual wishes he had more money so he could buy Merck down here, 20% off its highs. Both men had the identical investment philosophy. One has made fortunes with it. Another has lost fortunes with it. What philosophy could be so great for one person and so horrendous for another?

The answer, of course, is "no philosophy." What mattered wasn't that each individual bought and held a stock. What mattered was the stock. Somehow during the last five years we married a couple of related concepts and came up with an idiotic, corrupted version of the "buy-and-hold" investing strategy. We figured out that if we liked a product, we could buy the stock behind the product and if it came down and we still liked the product, we could do just fine over the long term.

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So we bought Akamai (AKAM Quote) because we read that it made sites move fast, and then when it went down we bought more and when it went down some more we bought more, until, well, we ran out of money and are hopelessly under water. Similarly, the Covad (COVD Quote) DSL line seemed so nifty and the installer was so nice that we bought Covad and dutifully averaged down until we were blown out of the game.

To me, a buy-and-hold strategy requires two things that are pretty scarce: a great company to buy and a lot of time to research that the company stays great. It is why I keep hounding people about balance sheets and corporate leadership and the culture of a company. And why I don't think much about the actual product a company makes.

I don't think about it because one of the niftiest products I have ever seen was the Zip drive, and one of the greatest shorts I have ever come across was Iomega(IOM Quote). I don't think nearly as much about the product as I do the balance sheet, because I loved all of Sunbeam's new products under Al Dunlop but the balance sheet became the balance sheet from hell.

Somehow, somewhere, in the last five years, "sell" became a dirty word. Every dip, rather than an occasion to re-examine an investment, became an opportunity to buy. Every stock was treated like a blue-chip, which gave us credence to buy more if it went down, and down and down. Now it is time to get back to basics, time to ask whether the company you are buying and holding has a good balance sheet, great management and a long-term history of earnings, because it turns out that many companies without such histories can't produce great results.

If you have trouble identifying solid balance sheets and great management, talk it over with someone. Get a professional's help. I can't tell you how much money would have been saved in this market had individuals not bought and held stocks that were unworthy of their capital.

Every day I meet people who justify bad decisions by clinging to their buy-and-hold lovey blanket. No amount of time can make up for bad decisions. Others have held on to stocks that they should sell because of the buy-and-hold "philosophy." Time does not heal all investment mistakes.

So, go over your portfolio. Ask yourself how well you really know the stocks you are buying and holding. If you don't know how much debt a company has or if you don't know who is running the company and how long and what his track record is, and if you don't know whether the company makes money or not, you may be kidding yourself with your buy-and-hold excuses. And remember, there are always stocks that go to zero. Every one of them had lots of folks who bought and held them, and they went to zero anyway.