Comments on: “Buy and Hold” Doesn’t Work If You Completely Ignore Valuation

By: Chad Brand

Chad Brand — Mon, 01 Jun 2009 14:04:22 +0000

Barry,
I agree, using any one metric exclusively is suspect. Investors typically give trough P/E’s to peak/unsustainable earnings and high P/E’s to depressed/trough earnings, when it comes to cyclical industries like home building and consumer credit. Those single digit multiples were a sign that investors did not expect those earnings to be sustainable over the entire business cycle. Conversely, multiples are high today because investors are betting that current earnings are depressed.

By: Barry Ritholtz

Barry Ritholtz — Mon, 01 Jun 2009 13:53:26 +0000

Valuation is potentially problematic when relied upon exclusively.

How do you explain the single digit P/E Home Builders in 2005?
The single digit P/E Investment banks in 2006?
The single digit P/E Commercial Banks in 2007

And all of the above in 2008?

By: Derek Pilecki

Derek Pilecki — Sun, 24 May 2009 14:49:26 +0000

You made some very good points. I would extend the argument beyond valuation to include strength of the franchise. Buy-and-hold, as practiced by Buffett and Munger, involves investing in companies with strong franchises. As time goes by, the franchises either get stronger as profits are reinvested in the business to create a stronger brand or expand distribution or introduce new products. Sometimes, strong franchises get weaker because of shifts in consumer tastes, increased competition or regulatory changes.

Using your Coke example, not only was valuation stretched in the late 1990s, but Coke’s franchise has weakened. Coke’s major market of carbonated soda drinks (CSDs) has stagnated. Consumers are shifting to healthier non-carbonated drinks such as water, iced tea and sports drinks. Coke missed a major opportunity to buy Gatorade’s parent, Quaker Oats, due to a board revolt against the CEO. Even though the price for Quaker was high at the time, the continued growth of Gatorade may have justified the acquisition. As a frranchise like Coke’s gets weaker, investors are less willing to pay high valuations for the stock.

“Buy-and-hold” is not a “buy-and-forget” strategy. As you suggest, the entry valuation is extremely important. As time passes, investors also need to continually monitor the strength of the company’s franchise. As a company’s franchise weakens, investors should exit these long-term holdings.

By: NewsFlashr Editor Picks for May 23 2009 | Penny Stock Trading System Blog

NewsFlashr Editor Picks for May 23 2009 | Penny Stock Trading System Blog — Sun, 24 May 2009 11:47:09 +0000

[...] From Peridot Capitalist, a lengthy post entitled “Buy and Hold Doesn’t Work if you Completely Ignore Valuation.” [...]

By: TheTradingReport » Blog Archive » NewsFlashr Editor Picks for May 23 2009

Sun, 24 May 2009 10:34:02 +0000

[...] From Peridot Capitalist, a lengthy post entitled “Buy and Hold Doesn’t Work if you Completely Ignore Valuation.” [...]