Buffett’s Buy and Hold Strategy is Misunderstood

“Our favorite holding period is forever,” Buffett is often quoted as saying. It is understandable that the average person assumes that Buffett does all his research upfront, buys a company that he feels is strong and capable of making a profit in years to come, and then sits back and enjoys the spoils. However, a look into Warren Buffett’s shareholder letters show that nothing could be further from the truth.

While it is true that Warren Buffett advocates doing nothing and not fretting the small stuff, that doesn’t mean that he’s snoozing and ignoring his companies under the assumption that they will continue to make him money. On the contrary, Buffett monitors his assets to make sure that they are still profitable, and when they are not, then he looks into options.

“We continue to make more money when snoring than when active. … [Y]ou simply want to acquire, at a sensible price, a business with excellent economics and able, honest management. Thereafter, you need only monitor whether these qualities are being preserved.” – Warren Buffett, 1996 Shareholder Letter

The last sentence is the part that most people miss. Buffett monitors  that the business maintains “excellent economics” and has “able, honest management” which will, by their very natures, ensure that the company remains profitable as long as possible. Only once a company stops being profitable does Buffett begin to let go. When he makes a change in his portfolio, it’s not an immediate changed based on news; it’s based on the company’s profitability.

“We are very reluctant to sell sub-par businesses as long as we expect them to generate at least some cash and as long as we feel good about their managers and labor relations. Gin rummy managerial behavior (discard your least promising business at each turn) is not our style. We would rather have our overall results penalized a bit than engage in that kind of behavior.” – Warren Buffett, 1996 Shareholder Letter

In short, Buffett’s buy and hold forever standard isn’t as simple as some people think. It’s not all about snoozing and just letting your portfolio work for you—it also involves careful analysis of each corporation to determine if they are still capable of making money, which can only be done within your circle of competence.

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