|If you invested in the Dow Jones Industrial Average in the late 1990s, you would basically be flat in terms of capital gains. Big, blue-chip companies are now trading around the same prices they were 10 years ago. This serves to illustrate just how important good timing is if you’re investing in equities. It also shows that, without dividends, you would have actually lost money due to inflation.So, it turns out that buy-and-hold equity investors haven’t fared too well over the last decade. It would be different if you owned the entire company like Warren Buffett likes to do. Then you get all the earnings and you reinvest in your business. For individual investors, though, this isn’t a possibility. Owners of secondary shares (common shares that trade on an exchange) are left to speculate in a marketplace that’s beyond their control. As you know, investing in stocks is a tough business to be in. Like any business, it takes a lot of expertise to make any money.As the main stock market averages have proven in recent history, a buy-and-hold investment strategy doesn’t really work unless you earn dividends. You can generate capital gains from equities, but only if you get in and out at the right times.In the equity investment business, you have to be nimble and willing to change your positions commensurate with the times. Even Buffett does this. He prefers to buy entire companies outright, but, due to a lack of attractive assets out there, he is forced to take positions in the
secondary market. Like George Soros and others, Buffett buys and sells a lot of shares. As a large, institutional investor, he buys shares when he feels they are attractively priced, and he gets out if the business situation changes.
My grandmother never put a dime in the stock market, because she felt stocks were too risky. Living through the Great Depression, she saw markets crash, banks fail, and homes lost. Times were so tough where she lived that people would knock on her door offering to chop wood all day in exchange for a meal.
When things got better, she was steadfast in her determination to put aside some money. Even when times were good, she bought day-old bread. Eventually, she accumulated quite a nest egg for herself and the only things she would invest in were certificates of deposit (CDs)
My grandmother believed in saving, not spending. She also believed in the power of compound interest, no matter what the rate. In a world where growth is relatively scarce and investment risk is high, my grandmother’s investment strategy seems somewhat fitting. When it came to business and investing, cash for her was always king.