There has been a lot of talk in the business media lately about how buy and hold has “failed” in the last decade.

The talking heads have been giving stats like, “if you had bought the S&P 500 Index in 1998, you would have made no money in the last 10 years.”

That’s apparently based on investing $1,000 in the index and never putting any more money into it.

Without a doubt, bear markets are scary beasts. If you had invested in 1929 in the Dow, you would not have “broke even” until 1952!

But one thing is usually forgotten by the talking heads: dividends. During that time period, your dividends would be re-investing. From 1929 to 1952, you would have had a 6% annual return if you had reinvested your dividends during that time period.

In recent years, dividends paid by the S&P 500 have been paltry. In fact, just last year, they were under 2%. But with the market sell-off, dividend yields have jumped. They’re still not historically high, but they’re decent.

Dividends are a lifeblood for buy and hold investors.

Dollar Cost Average

Additionally, if you can continue to add to your portfolio, you’ll dollar cost average (buy at the highs AND the lows and this will help insulate you from the big drops.)

How many people put money in in 1998 and never invested another dime? Perhaps those already in retirement. But everyone still working should have continued to sock it away.

So- the “return” since 1998 isn’t really nothing- as the talking heads make it out to be. It was much more.

Buy and hold makes even more sense in bear markets. You’re getting the stock much, much cheaper and have great upside potential.

Why is it that stocks are the only things no one wants to buy when they go on sale?

Don’t think about 1998. Think about 2018. Where do you think stocks and the economy will be then? Where do you want to invest to take advantage of the comeback?

Go for it. Buy and hold. The “rainy day” is already behind us. Plan for the sunshine.

To be an extraordinary investor, you have to have a strong stomach.

You can’t panic and you have to think for the long-term.

Easier said than done, I know.

But one investor did it for over 50 years. Her name was Ann Scheiber and she was a regular investor who lived in New York City. She grew $5,000 in 1943 into $22 million by 1995 all by buying good companies that paid dividends.

And she didn’t panic. She was fully invested during the nasty bear market of the 1970s. During the Super Bear of 1972-1974 she lost 40% on some of her investments.

Did she take her money out of the markets? No!

She reinvested the dividends which meant buying even more shares because those shares were cheaper after the market sell-off.

She had a basic philosophy, according to Time Magazine:

“Don’t worry about daily market fluctuations; reinvest dividends; hang tough.”

Do what Ann Scheiber did. Think long-term.

She was invested for over 50 years. She got rich the old fashioned way: she grew her money over time.

Don’t let this bear scare you. Buy dividend paying stocks now that they’re on sale. The dividends will give you income while you wait for the markets to recover. There are worst things then getting paid while you wait.

Read about Ann Scheiber’s investments and get inspired.

If she can do it, so can you.

Bill Miller has fallen…and he can’t get up.

Not yet anyway.

Bill Miller is the famed value mutual fund investor at Legg Mason Value Trust. He is the only portfolio manager who beat the S&P 500 for over a decade. His “streak” lasted 15 years- ending in 2005.

Since the end of that amazing run, he has struggled. In fact, this year, his fund is getting hammered and investors are fleeing.

But in his letter to investors at the end of the second quarter (end of July), he said the best time to invest in Legg Mason was after they had horrible performance (the storm before the calm, so to speak.) Yet- investors usually chase returns and therefore continue to flee.

In that same letter, he talks about recently talking to Warren Buffett about how difficult it has been to be a value investor.

“Mason Hawkins said, “Warren, I’m an optimist. I think this whole thing can turn quickly and surprise people. Are you an optimist?”

“I’m a realist, Mason,” the sage replied. Warren went on to say he was optimistic long term but said it would take some time to work through the current challenges.

Bill Miller didn’t accomplish his incredible 15-year run by a fluke. That took hard work, investing skill and good instincts.

He seems a bit lost right now about the direction for himself, and value investors in general. From the letter:

“As a matter of psychology, I think most of us value investors think we have plenty enough bargains already, and may not be able to handle that many more. Or more accurately, our clients may not be able to.”

It’s a tricky market. Sectors that seem like a “value” such as the financials- may not turn out to be (or it may be too early.)

Learn Lessons from Bill Miller

Bill Miller’s portfolio got hammered recently because he bet on housing and financials and didn’t bet on energy or the metals. Did he just miss the boat or will he be proved right eventually?

Fundamentally, many of the financials and homebuilders ARE value plays. But so were the energy stocks and the metals.

Many articles in the mainstream press are piling on about how “awful” Bill Miller’s more recent track record is. But why focus on the negative? He has an amazing record and I have no doubt he’ll turn it around.

It’s what the best investors do.

Some lessons:

1. Remember to follow value fundamentals even if the herd is going another way.

2. Not all value plays are true “values”- be prepared to re-deploy your money.

3. When people are buying, maybe you shouldn’t be.

Let’s just say, we should all be as “awful” as Mr. Miller.

Many investors have invested diligently in General Motors (GM) or Ford (F) over the years (especially those that worked for either company.)

And now, sadlyl, you have nothing to show for it.

Why didn’t buy and hold work for these companies? Does that mean buy and hold never works?

A lot of buy and hold skeptics look at GM and Ford and say, “see- this is why you shouldn’t buy and hold.”

But buy and hold DOES work- if you own companies that are growing their business. How long ago was it when either of these car companies actually made money off of building cars?

General Motors was profitable earlier in this decade because it owned a big lending unit, GMAC, that did, among other things, home loans. But GM hasn’t made money off of its actual auto business in years.

The company hasn’t made money at all since 2005. And they won’t in 2008 (given the current economic conditions.) That is four years of losing money. Who wants to own a company that never makes a dime?

Is that the kind of company you want to own for the long haul?

You Must Stay Vigilent

Buy and Hold doesn’t mean you buy and walk away without ever checking to see if your companies are still sound investments.

Warren Buffett has said that the best time to sell is never- UNLESS- company fundamentals have changed. Either the company is no longer competitive in its industry, the management is flawed, or it has changed its focus (i.e. it used to sell cars but now bundles home mortgages.)

The signs have been there for over a decade with the American automakers. Yet, understandably, it’s still hard for longtime investors to see that the company is going the wrong direction.

Don’t Let the Dividend Suck You In

Many investors, especially in GM, got lulled by the heafty dividend the company has paid over the years. It has only cut the dividend twice- in 1992 and just recently in 2005. The 2005 cut was 50%. It’s likely they will be cutting it again soon- given the outflow of cash they are burning through every month as car sales plunge.

Right now, GM is paying a yield of nearly 9% (which may or may not be safe.) Many investors look at that and think, “at least I’m getting something.”

The stock is down 70% in the last year. Is that really worth a now 9% payout? There are plenty of other financially sound, and growing, companies that are paying close to the same dividend.

Remember: Buy and Hold isn’t a license to walk away from your investment.

What does McDonald’s do? They operate hamburger restaurants. What do they make all of their money from? Their restaurant business.

What does Phillip Morris do? They make cigarettes. What do they make all of their money from? Selling cigarettes and other tobacco products.

What does General Motors do? They make cars. What do they make all of their money from? They don’t. (And before spinning it off- they made their money off of home mortgages and other loans.) But they’re a car company, right?

It seems obvious, doesn’t it?

Buy and hold can work if you’re buying great companies with earnings growth.