Expert: Gina Boykin - 8/26/2007

Question
Hello!

I have been looking at stocks like Yahoo, Walmart, Coca Cola etc.


And it seems to good to be true.


For example: if one had bought one thousand dollars worth of shares of
Yahoo back in 1996 when the price per share was one dollar,


today with splits you would have 24,000 shares and since the price per
share is 23.59, you would have: $566,000.


Wal-Mart for example, back in 1974 was 4 cents per share. If you had
bought $1000 worth of shares that would have been 25,000 shares.


It split 9 times since then. So you would have 12,800,000 shares. At
the current price of $43 per share you would have $550,400,000. (Half
a billion).


Now some may say: 'yeah but you have to chose a winning stock many
stocks will lose money or even go bankrupt'.


But I say: Let's say you spend $50,000 on stocks, spening $1000 each
in 50 companies. Even if 49 of those 50 companies went bankrupt, as
long as you chose one winning stock (like Wal-Mart or Yahoo) you would
be a millionaire!


Just seems to good to be true and too easy. This 'buy and hold'
strategy.


Is there something I am missing? Some catch?


Any comments would most appreciated, thank you!!


Asad Raza
Racine, Wisconsin
asad_raza5367@hotmail.com

Answer
The "buy and hold" strategy is one that Warren Buffet uses, and you see that he is the 2nd richest person in America (and has been every year for quite a while).  You are right in your assumption.  The reason that most people aren't rich using that strategy is:

1-Most people do not have $50K to invest at one time in stocks.  In fact, currently, the majority of people in America have $1,000 or less in savings, and no retirement fund.

2-People usually do not hold stocks for decades. Our instantaneous gratification society means that most people hold stocks for only a few years.  They get worried when the price goes down and instead of waiting for it to reverse, they sell at the worst time.

3-Some people still value security more than financial freedom.  They are financially illiterate, or want something safe and secure to invest in, so they don't invest at all.

One way to get the same "effect" of your strategy is to invest in mutual funds.  Mutual funds were created on this presumption - diversity allows you to benefit from the great companies and softens the losses for the smaller companies.  If someone invested $50K in growth mutual funds and held it for 25 years at an avg. of 12.5 annual growth, they would have over $1M as well.

Remember that if someone selected 50 companies, none may end up "all-stars".  There are thousands of companies to chose from at any given time, so it's not guaranteed to have 1 great pick - even from selecting 50.  It is very unlikely that all would go down in value either, though, especially if spread across different industries.  You would basically be creating your own portfolio or a personalized mutual fund, and may beat the returns of some mutual funds.

For most people, mutual funds are a better choice, because they do not have to take the time to do all of the research that a fund manager does all-day, every day.  However, if someone wants to do the research, and has the funds to make the investment, they could definitely use the buy-and-hold strategy and expect significant growth over the long-term.