When you and I were first taught about investing, the general advice was to buy stocks and hold them essentially forever. This worked very well for our parents and grandparents, who just followed the herd. “Buy and forget,” my parents told me. “Look at your portfolio when you retire and count the money.”
That complacent attitude worked fine in a previous era. As America turned into an economic powerhouse during the 20th century, many companies grew to great heights. If you grabbed onto their coattails, your investment account rose commensurately.
Warren Buffett uses this approach, and it paid off handsomely during his heyday, creating the greatest wealth of any investor in history. There is no disputing the results. But the world changes, and when that happens, we have to make adjustments. The buy-and-hold approach may not be the best way to build wealth today.
Buy and hold doesn’t work
I am not talking about actively trading here, which is not a winning strategy for long term results. However, you do have to stay in tune with what is happening in the investing world and how it affects your investments. If that means clearing out some names, then so be it.
It is dangerous to get so attached to your stocks that you can’t sell. Stocks are pieces of paper that help you create wealth. When you become a stockholder, you become part owner of a company. Some of those companies may excel and some may falter. If you fall in love with a company story one day and decide to buy their stock, all it takes is one devastating situation to knock that company to its knees. Your investment theory will be shattered, and you’ll likely suffer great financial loss. Could you have done something differently? Maybe, but maybe not.
Look at what happened to GoPro
GoPro is a great case study for this article. Remember when they were the big new thing? Everyone thought this company would revolutionize the industry. The stock soared in 2014, building a market capitalization of over $13 billion. At best, they would take over the world. At worst, they would be acquired by a suitor.
Instead, GoPro’s stock price suffered a devastating drop in value in 2015, falling about 85% from its peak. Long term investors who bought into the hype lost big time.
Could you have avoided the GoPro disaster? Quite possibly. You need to pay attention to money flow, institutional buying/selling, volume and indicators that precluded the catastrophic fall. Keeping an open mind and being willing to give up a stock can be the difference between achieving great wealth in a short time frame and bumbling along over the long term.
Investing 101: don’t get attached!
This is not a criticism of investing choices. Instead, this is an important lesson about investment styles in the current environment. When you invest, KNOW your companies and be willing to let go when you spot potential danger on the horizon.
This article was updated on May 11, 2023.
Copyright: olegdudko / 123RF Stock Photo