CONFERENCE CALLS
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INVESTMENT OPINION
Buy & Hold Apocalypse? -- Introduction
With every market correction comes a flurry of pronouncements that the so-called "buy and hold" approach is dead. Without even an attempt to define what is meant by the phrase "buy and hold," a bevy of journalists armed with all sorts of self-serving quips from traders and market timers descends upon the heartland of America. They then try to scare individual investors into putting all of their defined benefit retirement plans into the "money market" option, warning that stocks are "dangerous." The latest in a regrettable series of nonsense appeared in the Washington Post's Investing column over the weekend, but this is simply representative of a growing sentiment in pressrooms and on trading floors across the country. "Buy and hold is dead," they whisper. Now, it seems, only traders and market timers can make money. Individual investors are best-served by forking over their hard-earned savings to "financial professionals" who can actively manage the money appropriately, lining their pockets the whole time.
What is the "buy and hold" approach? Most people now nattering on about the subject in the wake of the recent market correction take it as "buy at the top and hold forever because you cannot admit you made a mistake." Others who have taken thinkers like Peter Lynch, Warren Buffett, Charles Munger or Phil Fisher at the facest of face values have talked about the "buy what you buy" school of investing that has individual investors mindlessly purchasing the shares of companies whose products they use without regard to fundamental value, holding them forever. All focus on the supposition that saying "buy and hold" means that people are purchasing shares without regard to fundamental value because if they hold for the "long-term" they are guaranteed to make money.
Frankly, this is a really shallow interpretation of the maxim "buy and hold." The buy and hold approach should focus on selecting quality companies with current market values that are at a discount relative to their underlying economic value. By accumulating these issues selectively over time and holding them, an investor minimizes transaction costs while maximizing the possibility of enjoying the long-term returns generated from the business. With the overwhelming correlation between corporate profit growth and long-term share price appreciation, there is quite a bit of wisdom in this approach, if the returns of a financial asset over time approximate the returns of the underlying company, either in profit growth or return on equity (ROE). (The reason why ROE is important is that excess cash generated by the business can be used to enhance earnings per share (EPS) growth through regular and systematic stock buybacks.)
The buy and hold approach minimizes costs and allows the investor to participate in the long-term growth of a quality company *plus* any change in its market valuation relative to its intrinsic economic value *providing* they have purchased the shares at a significant enough discount. Rather than simply setting up the buy and hold approach as a straw man to be easily beaten apart by spurious market timing logic, a comprehensive look at the approach and the alternatives and a serious questioning of which is really better for the *individual* investor is what the Buy And Hold Apocalypse? series will do.
**This Fool owes a special thanks to Legg Mason Fund Advisors' Bill Miller for information in this article and other articles in this series.**
Tune into the Evening News's "Fool on the Hill" column tonight for an exciting look at stock returns over various time series and the implications for the buy and hold approach.
CALGENE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CGNE)") else Response.Write("(NASDAQ: CGNE)") end if %>, up $1 3/4 to $6 5/8, received a helping hand from MONSANTO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MTC)") else Response.Write("(NYSE: MTC)") end if %> this morning after the massive agri-biotech concern raised its stake of Calgene to 54.6%, adding 6.25 million Calgene shares at $8 a share. Calgene is famous for making the world's first genetically-altered tomato.
Merrill Lynch raised shares of PALL CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PLL)") else Response.Write("(NYSE: PLL)") end if %> to "near-term buy" from "accumulate" today, driving shares of the filtration and separation concern up $1 3/8 to $24 1/2 this morning. The stock is now Merrill's "Focus One Stock of the Week."
GRAND UNION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: GUCO)") else Response.Write("(NASDAQ: GUCO)") end if %> continues to mount an incredible turnaround after scraping up against the dark door of financial ruin only a few months ago. The supermarket's shares were up $7/8 to $6 1/2 today after the firm raised $100 million in a convertible preferred offering.
The buyout firm of Kohlberg Kravis Roberts & Co. (KKR), most famous for its leveraged buy-out of RJR NABISCO <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RN)") else Response.Write("(NYSE: RN)") end if %>, has announced it is shopping around the 64% of AMERICAN RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ARN)") else Response.Write("(NYSE: ARN)") end if %> that it currently owns, boosting shares of American Re $4 1/2 to $55 3/8 this morning. This move comes a few weeks after the merger of NATIONAL RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NRE)") else Response.Write("(NYSE: NRE)") end if %> and GENERAL RE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRN)") else Response.Write("(NYSE: GRN)") end if %>.
LERNOUT & HAUSPIE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LHSPF)") else Response.Write("(NASDAQ: LHSPF)") end if %> rose $2 1/4 to $19 this morning after the company announced that MICROSOFT <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: MSFT)") else Response.Write("(NASDAQ: MSFT)") end if %> had chosen its text-to-speech technology for use in future text-to-speech applications.
Nailing its fourth quarter estimate of $0.24 EPS, RESPIRONICS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: RESP)") else Response.Write("(NASDAQ: RESP)") end if %> rose $1 1/4 to $20 today after reporting a 25% increase in its obstructive sleep apnea products and a 30% increase in its ventilatory business. Sleep apnea is a disorder that typically manifests with exogenous obesity, e.g. simply being overweight.
FORE SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: FORE)") else Response.Write("(NASDAQ: FORE)") end if %> rose $3 1/4 to $28 this morning after Goldman Sachs added the asynchronous transfer mode (ATM) and local area network (LAN) switch networker's shares to its priority list. ALTERA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ALTR)") else Response.Write("(NASDAQ: ALTR)") end if %>, ONEWAVE INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OWAV)") else Response.Write("(NASDAQ: OWAV)") end if %> and PARAMETRIC TECH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: PMTC)") else Response.Write("(NASDAQ: PMTC)") end if %> were also added and rose $2 3/8 to $40 7/8, $2 1/2 to $15 1/4 and $2 3/4 to $41 1/4, respectively.
A share buyback and positive comments about future prospects caused a $2 to $43 1/4 rise in the shares of R.P. SCHERER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SHR)") else Response.Write("(NYSE: SHR)") end if %>. The drug-delivery system concern will buy back up to 5% of its outstanding shares.
CAIRN ENERGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CEUS)") else Response.Write("(NASDAQ: CEUS)") end if %> dropped $1 1/4 to $10 1/8 after totally blowing its second quarter estimates. The company reported $0.05 EPS while the Street was looking for $0.15 EPS, not exactly an impressive showing.
Negative comments from semiconductor equipment companies continue to drive down the shares. This morning front-end equipment manufacturer ADVANCED SEMICONDUCTOR MATERIALS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ASMIF)") else Response.Write("(NASDAQ: ASMIF)") end if %> gave a warning about a weak second half, driving the stock down $1 to $6 1/16. LAM RESEARCH <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: LRCX)") else Response.Write("(NASDAQ: LRCX)") end if %> was also down $1 to $23 after bearish comments in the conference call.
ONTRAK SYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: ONTK)") else Response.Write("(NASDAQ: ONTK)") end if %> dropped $1 to $14 1/4 this morning despite the fact that the manufacturer of chemical-mechanical planarization capital equipment met its $0.18 EPS estimates. Continued concern about the semiconductor capital equipment industry going forward is weighing on the shares.
Shares of networker XYLAN CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: XYLN)") else Response.Write("(NASDAQ: XYLN)") end if %> dropped $3 1/4 to $39 1/4 this morning on no news. Foolish correspondent Alex Schay is working on a feature piece on Xylan, which recently came public and was added to Morgan Stanley's New Nifty Fifty. Look for this to debut tomorrow.
OAK TECHNOLOGY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: OAKT)") else Response.Write("(NASDAQ: OAKT)") end if %> was mashed for $13/16 to $6 3/4 this morning after yesterday's grim conference call. The firm's MPEG controller market is suffering steep price declines and they have no idea when this will end. Apparently all is not lost in the industry, as shares of C-CUBE MICROSYSTEMS <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CUBE)") else Response.Write("(NASDAQ: CUBE)") end if %> rose $1 7/8 to $25 1/4, implying that this might be a company-specific problem in the low-end, commoditized area of MPEG controllers.
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