Understanding Stocks

70 UNDERSTANDING STOCKS
3. Don’t become so devoted to a strategy that you are blind to the
fact that you are losing money. Money is the scorecard that determines
whether your strategy is working.
You have to take the time to find the strategy or strategies that fit
your personality and lifestyle. Unfortunately, there are no magic
answers to finding success in the stock market. For most people, the
only way to find out what ultimately works on Wall Street is through
trial and error.
Buy and Hold: The Most Popular Strategy for Investors
The reasoning behind the buy-and-hold strategy is that if you buy a
stock in a fundamentally sound company and hold it for the long term
(at least a year), you’ll realize a profit. The beauty of a buy-and-hold
strategy is that you can buy a stock and watch it rise in price without
having to constantly watch the market. Investors who bought companies
like IBM, GE, and Microsoft in the early days made huge sums of
money on paper without having to pay much attention to the market.
The other advantage of buy and hold is that because you are not constantly
buying and selling stocks, you are paying very little in brokers’
commissions. Buy and hold is the easiest investment strategy to use,
and, in retrospect, it worked extremely well during the bull market of
the 1990s.
Perhaps the only time buy-and-hold investors sell is if something
fundamentally changes in a company. They don’t sell because of what
is happening to the market, the economy, or the stock price. They are
focused only on the business, and they intend to hold their reasonably
priced stocks as long as possible.
One of the most successful buy-and-hold investors of the twentieth
century is billionaire Warren Buffett. He rarely buys stocks in technology
companies, but rather buys the stocks of mundane companies such
as insurance companies and banks, and he has the skill (along with a
team of independent analysts) to buy low and sell high.
In the hands of a professional, buy and hold can work, although
many investors who used this strategy ended up losing their shirts during
the recent bear market. Rather than buying low-priced value stocks,