About two weeks ago, I read an interview of SA Superstar Buyandhold 2012, who recently bought some shares for the first time after 5 years. In that interview, apart from explaining his recent purchase, he also analyzed his investing philosophy. As he is an exceptional investor, every investor will benefit from reading that interview. In this article, I will comment on the investing rules of Buyandhold 2012.
First of all, Buyandhold 2012 has an impressive record in investing. Thanks to his investing strategy and a series of excellent stock selections, he easily reached his retirement goal long before the vast majority of individuals reach it. Therefore, individuals who strive to meet their own retirement goal by managing their personal portfolio should certainly pay attention to the investing rules of Buyandhold 2012. As he said in his interview, he always looks for stocks that meet the following criteria:
1. Stocks that have outperformed the S&P (SPY) for at least 10 years.
2. Stocks that have raised their dividend for a minimum of 10 years.
3. Stocks that have doubled their earnings over the last 5-7 years.
4. He prefers stocks that trade around 52-week lows.
5. He does not like volatile stocks.
I will now provide my own analysis and comments on each of the above investing rules of Buyandhold 2012.
1. Choose stocks that have outperformed the S&P for at least 10 years
While most investors underestimate the returns of the S&P, the index actually has a great long-term performance. To be sure, it has offered an average annual return of 8.6% since 1960. Therefore, the stocks that have outperformed the S&P over a long period are certainly worth examining. Investors should just make sure that the outperformance is smooth and consistent and not concentrated over a short period. Otherwise, the stock runs the risk of incurring reversion to the mean, i.e., underperforming the index in the future.
2. Choose stocks that have raised their dividend for a minimum of 10 years
While most SA readers are obsessed with dividends, I am not that fond of dividends. In fact, the stocks that offer the best returns are the high-growth stocks, which tend to reinvest all their earnings on their profitable business and thus pay negligible or no dividends. For instance, Cognizant Technology Solutions (CTSH) has rallied almost 900% since the bottom of the Great Recession and has initiated a dividend only this year. In fact, the initiation of a dividend probably signals that the…