People are fond of quoting Berkshire Hathaway (BRK.B) CEO Warren Buffett, and rightly so: He’s one of the world’s most successful investors. A favorite Buffett quote, from the 1988 Berkshire shareholder’s letter, is “Our favorite holding period is forever.”
Many people have used this quote to support a long-term buy-and-hold strategy, but, like many of Buffett’s observations, it’s much more nuanced than that – as it should be. A look at the stocks in the Russell 1000 Index, which measures large-company stock performance, shows that some stocks really shouldn’t be held forever.
Of those 1,000 stocks, 163 remain 50% or more below their all-time highs. The Russell 1000 has fallen 5.93% since its Sept. 20 all-time high, according to Morningstar.
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The 50% Club
This group of beaten-up stocks includes some well-known members.
Citigroup (C), for example, is worth just 10.9% of its all-time high, set in August 2000. Morgan Stanley (MS), hit an all-time high of $110 in September 2000. It closed Friday at $44.13. And snakebit General Electric (GE), whose high-water mark was $60.50 in August 2000, traded hands at $8.02 on Friday. (This data, from S&P Global Market Intelligence, is adjusted for stock splits).
If you were unfortunate enough to buy any of these 163 stocks at their all-time highs, you’re more likely to get a pot of gold from the wee leprechauns in your back yard than to break even. A 50% decline requires a 100% gain to recoup your loss. And while dividends can ease the pain of losses, it can take a long time for dividends to get you back to even. Morgan Stanley, for example, is down 35.2% from its all-time high if you include reinvested dividends; General Electric is down 76.01%, according to Morningstar.
Many of the stocks in the 50% club are highly cyclical. For example, chip-maker Micron (MU), oil exploration company Apache (APA) and precious metals miner Newmont Mining (NEM) are good stocks to leave while laughing. While they have regular times in the sun, their big downturns often overwhelm their big gains.
Similarly, many of the bank stocks on the list were casualties of the most recent financial crisis. Banks suffer disproportionately in financial downturns, because banks are often at the heart of most financial downturns. It shouldn’t be surprising to see that KeyCorp (KEY) and Huntington Bancshares (HBAN) are among those that remain 50% or more below their all-time highs. Mutual fund companies Invesco (IVZ) and Legg Mason (LM) also are on that list.
So what did Buffett mean when he said, “Our favorite holding period is forever?” When you think about it, the statement alone doesn’t say much: Most people would like to have a stock that does well forever. What’s more, the Buffett quote is really half a quote. Here it is in its entirety (emphasis mine):
“In 1988 we made major purchases of Federal Home Loan Mortgage Pfd. (“Freddie Mac”) and Coca Cola. We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds. Our holdings of Freddie Mac are the maximum allowed by law, and are extensively described by Charlie in his letter.”
Overlooking the first clause of the sentence – “In fact, when we own portions of outstanding businesses with outstanding managements” – is overlooking an awful lot. Buffett is not saying that all stocks should be held forever: Just the ones with outstanding businesses and managements. Does he sell companies that disappoint? Absolutely. It should be noted that Freddie Mac is no longer one of Berkshire’s holdings, while Coca-Cola (KO) is.
Currently, Standard & Poor’s ranks 10 of the stocks now selling at 50% below their all-time highs as a strong buy:
- Celgene (CELG)
- Exelon (EXC)
- First Horizon National (FHN)
- FirstEnergy (FE)
- FreeportMcMoRan (FCX)
- Marathon Oil (MRO)
- Morgan Stanley
- Mosaic (MOS)
- Olin Corp (OLN)
- United States Steel (X)
If you’re looking for flowers to water, these might be worth a look. The full list of 50% Club stocks is below:
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