A Lesson In Buy And Hold

Buy and hold is perhaps one of the best investing lessons there is.  The idea is simple.  buy stock often and hold on to it forever. Don’t look at daily or weekly stock charts, and don’t try to jump into the next hot stock every 5 minutes.  When I first started investing I didn’t have a lot of money and since I didn’t have $3,000 to get into a mutual fund I bought individual stocks. Looking back on what those stocks have done in the past 15 years I certainly wish I had held on to them.

How I Failed By Not Heading The Lesson Of Buy And Hold

15 years ago, when I was 16 I opened my first IRA with the help from my parents while still in High School.  I had $600 that I could put in it and at my dad’s suggestion I purchased 100 shares of Redhat Linux, which at the time was trading at around $6 per share.  I don’t have the exact records, but this is roughly what happened.  Today Redhat shares trade at around $82 per share.  Had I held onto those shares 15 years later my investment would be over 13X what I originally put in,  a total of $8,200, that turns out to be roughly a 19% annualized return. Doh!

About a year or two later I sold those shares at a price that I really can’t recall, but I did pretty well on it.  I later invested in SpaceDev and Hansen Natural with $1,000 each. Why?  Well SpaceDev because in 2004 – 2005 they were making huge strides in the private space market and I wanted to get a piece of it. In 2008 SpaceDev was acquired by Sierra Nevada Corp for 72 cents per share.  Since I paid around 50 cents per share this represented a 44% gain over 3 years, not great, but still a 13% annualized return. This was also a 13% return I didn’t receive because I had sold the stock in 2006 and barely broke even.

I invested in Hansen Natural because, I kid you not, it had the most movement on one random day on the stock exchange and I decided to buy it to see if I could “tag along” on the gains. This investment “strategy” was ALMOST as good as having a drunken monkey throwing darts against a spinning board with random company names scribbled on it.  Hansen Natural was being propelled by its introduction to the energy drink market, with this drink called “Monster”.  I sold it less than a year later at double my original investment of $1,000. I had bought it at the split adjusted price of roughly $1.80 in June of 2005.  Hansen actually renamed its company to Monster Beverage due to the success of the energy drink.  Today Monster Beverage trades at $47 per share.  That $1,000 investment would now be worth around $26,111. With a 12 year investment this would be an annualized return of 31%.

I obviously had NO CLUE what I was doing.  It is mostly blind luck that these stocks ended up performing well, but they did none the less.  Although these investments at the time were a large percentage of my net worth, they were really small in the grand scheme of things.  I ended up actually withdrawing all the contributions I had made to my Roth IRA when Mrs. C. and I bought our first house to help with the cash crunch.  All my investments since then have been in mutual funds, up until the middle of last year when I bought some Tesla Stock. Had I kept those stocks until today, they would represent a large portion of my investment account.

For quite some time I have been waving the flag of index mutual funds, however I am beginning to think that a small portion of a persons portfolio should be made up of individual stocks that are market disruptors.  Depending on risk tolerance level anywhere from 5% to 25%.  As an example let’s use 10%.

Worst case scenario: If 10% of your portfolio goes to $0, you still have the other 90%.  But if that stock performs like Hansen Natural over 15 years, it will have become worth 26X its initial amount, or 2.6X the initial portfolio amount.  That’s kind of a big deal. I did a similar cost/benefit analysis when I decided to put around $12,000 into Tesla Stock.

Buy And Hold: The Case For Tesla:

Tesla is overvalued by most any method of valuing stocks.  For a company that made under 100,000 cars last year to have the same market cap as Ford is insane.  This is the number one problem with Tesla stock. Tesla is overvalued because most investors are looking at a short time horizon.  Looking at a long time horizon and using a buy and hold strategy, Tesla’s future as a stock looks much more promising.

• Tesla has traded in the same range since 2014 despite huge strides in revenue, cars produced, and of course the acquisition of Solar City.
• Tesla has a firm “Why”. The company has a clear focus and all of its efforts are geared towards that focus: To hasten the global transition to sustainable energy.
• Tesla Model 3 has 400,000 pre-orders; without having to advertise.  Advertising is a major expense for all car manufactures…except for Tesla.
• Batteries:  With the Gigafactory Tesla has greatly driven down the cost of lithium ion batteries, giving them a huge competitive edge.  Their battery technology makes solar power make sense for both large installations and home installations in a much wider area of the the world than solar did before the Tesla PowerPack and PowerWall.  This increases demand for BOTH batteries and Solar.
• Tesla is planning on building several more Gigafactories which will drive down costs further.
• Solar: Solar panels can last for several decades.  The new Tesla roofs are an amazing prospect.  IF they can get the manufacturing cost down to where it truly is competitive with traditional roofing material, and I’m talking asphalt not slate, then every single roof replacement in the country and perhaps the world will be using solar roofs.  With a traditional solar roof system you might only install panels on the south facing side of the roof, ignoring the East, West, and North.  Well, that’s a lot of square footage that does get some sunlight, just not as much as the South does throughout the day.  If literally every square inch of the roof is producing power the house should be able to generate 100%+ of its energy needs, even with a Tesla in the garage, and even in northern climates.
• Charging: Tesla has built an astonishing Supercharger network, which it is rapidly expanding.  The Supercharger 3 should be able to fill up a vehicle in not too much time longer than a gas vehicle. This takes away the major problem with range that people have with electric cars.  Now let’s look at the big picture.  Can you imagine if Henry Ford owned virtually every gas station?  That is what the Supercharger network represents.  Thousands (and soon to be tens of thousands) of fueling stations owned by the company that sells the vehicle.
• Autonomous Driving:  No one is anywhere near Tesla in autonomous driving.  Tesla has invested big bucks into this technology and has millions of miles of data from its autonomous driving program.  All vehicles being produced NOW have the hardware for full autonomous driving.
• Tesla Vs Uber: Elon Musk plans on Tesla being able to operate a shared services car network where owners can put their car to work while they are sleeping or working.  The car, being able to drive autonomously will essentially serve as an autonomous Uber driver and earn the owner money with zero effort.

I truly believe that it is possible that Tesla will become a trillion dollar company within a decade.  If that were to happen my total investment of $12,000 will become worth roughly $370,000.  Over an 11 year time frame that’s an annualized growth rate of 36%.  For all this company has going for it, I don’t think  it is unreasonable to think it could grow at a faster rate than Monster Energy drinks did.

So what if Tesla doesn’t knock it out of the park? This $12,000 investment represents under 4 months of savings at our current rate.  The majority of our money is still going into stock mutual funds.   If Tesla were to go to 0 it will not affect my early retirement timeline.  The biggest risk that detractors say about Tesla is that it is extremely overvalued and that at these prices it doesn’t make sense to invest.  I personally would argue that the same was true of Redhat in 2002 and of Amazon since its IPO.

I plan on holding my Tesla shares for at least a decade and possibly until retirement when I will diversify into much safer asset classes.

Other Investments To Buy And Hold

As time goes on I will most likely invest roughly $1,000 per year into small companies that I feel have a shot at explosive growth over the long term.  This represents about 2.0 – 2.5% of my yearly savings.  This is a level I feel comfortable with for such investments at this point in time.  As my total net worth increases I may increase this level.

Do you trade actively or do you follow buy and hold when it comes to individual stocks?