Buy and Hold Strategy Loses Favor
Sat Feb 9,10:15 PM ET

By Nick Olivari

NEW YORK (Reuters) - "Buy and hold" as an investment strategy is pretty much dead, money managers say.

Though some small investors may still buy a stock and hold onto it for years, professional money managers, whose performance is rated quarterly, have a shorter time horizon.

That flies against the wisdom of Wall Street sages like billionaire Warren Buffett (news - web sites) -- the head of Berkshire Hathaway Inc. and one of America's most watched investors -- who buy based on long-term value, not necessarily recognized by the market, and ignore the day-to-day gyrations in a stock.

But with performance a key marketing tool in attracting investor dollars, money managers sell when the purchase is profitable or when the reasons they bought are no longer valid.

"You have to keep looking at the reasons you have the stock," said James Luke, 56, vice president with Raleigh, North Carolina-based Branch Banking & Trust Co., which oversees $16 billion, and who has been a portfolio manager for 30 years. "Information flow is so much greater now and companies change, competition changes ... you just can't forget."

Luke and other managers say there are no more so-called one-decision stocks, where the only choice was to buy.

It wasn't long ago that the now-failed energy trading giant Enron Corp. and high-speed communications network operator Global Crossing Ltd., which filed for bankruptcy in January, were thought to be solid long-term investments, Luke notes. Today, they trade for pennies.

"You want to be in stocks," said Daniel Bandi, money manager with the Armada Small-cap value fund. "But when you own individual companies, you want to be vigilant as things change."

The numbers tell the story: The average turnover within a mutual fund is now 114 percent a year, according to Chicago-based MorningStar, which monitors and rates fund performance, meaning that the fund effectively changes all the shares in a portfolio every 12 months or so.

MAINSTREAM GETTING SMART

Individual investors are also pushing the "sell" button more often. Most hold stocks for less than a year these days, down from an average of eight years in 1960, according to a recent study by Boston-based consulting firm Bain & Co.

The so-called nifty-50 stocks of the late 1960s are a case in point. Then, investors who owned the 50 were said to own the market.

But after the bear market of the 1970s, where the carnage rivaled the more recent Nasdaq plunge, some of the "nifty" stocks took years to recover -- if they recovered at all.

Shares of office equipment maker Xerox Corp. lost 72 percent in the 1973-'74 bear market and took 24 years to recover, according to Ned Davis Research. Instant photography company Polaroid Corp. lost 90 percent and required 28 years to get back to where it once traded, although it then drifted into bankruptcy and now trades for pennies.

Another "nifty" glamour stock, Avon Products Inc. , the world's largest direct seller of beauty products, saw its stock languish for 24 years, while investors in power tool company Black & Decker Corp., the No. 1 tool maker, waited 23 years to get back what they had paid for the stock at its peak at the time.

Money managers say with more free information available today via the Internet than investors could buy 10 years ago, the trick is to scramble quickly at the first hint of trouble.

"Times have changed," said Kevin Gaugahn, portfolio manager for Strong Capital Management Inc. "The market is more volatile and it puts such a dent in your portfolio" if you don't move quickly and dump the losers with bad news.

Enron stock changed hands at $90 in August 2000, but last traded at 38 cents on the over-the-counter market.

HUNDREDS OF EXAMPLES

And there are hundreds of less volatile examples. Communications systems developer Comverse Technology Inc. was trading at around $57 at the beginning of July 2001, but only days later it could be acquired for $25 after warning of an earnings shortfall and reducing growth forecasts.

"It pays to stay on top of breaking news and dump stocks accordingly," said Darryl Mikami, a money manager with PM Putnam Investments.

While some companies, like soft drinks maker Coca-Cola Co. deliver products that cannot be so easily displaced with consumers, money managers are not so sure that other large-cap names will be the leaders in their markets 30 years from now.

"A Microsoft (Corp.) can be blown away tomorrow by someone with a better idea," said Branch Banking & Trust's Luke.

Still, retail investors who buy stocks and forget them until they retire can draw some comfort from history.

Taking a portfolio of eight brand-name stocks at random from the 1970s and checking their returns shows that an investor made more money by holding those shares for a 31-year period, than investing an equivalent amount in the Standard & Poor's 500 index, even though some of those stocks turned into dogs, according to Kentucky-based BigTrends.com.

Investing $1,000 each in DuPont Co. , General Electric Co. , General Motors Corp. , International Business Machines Corp. , Philip Morris Cos. , Polaroid Corp. , AT&T Corp. , and Xerox Corp. , shows six stocks posted gains over time, and three far outperformed the broader market.

The total return from investing $8,000 in those eight stocks on the first trading day of 1970 and selling on Dec. 31, 2001, was $211,322.55 -- more than double the $98,275.20 an investor made by investing the same amount in the S&P 500 index.