March 31, 2010 - Buy and Hold. It's an investment strategy that Warren Buffett believes in, practices, makes a fortune with. But is that an antiquated methodology given the huge swings in the stock market we've all witnessed over the last several years? And how can it apply to the technology sector when every day a new, disruptive software or chip is introduced, revolutionizing the industry?

One of the constant threads in a successful business is the ability to create new products or be more efficient over time or invent a new category. For example, Apple continues to amaze investors with its continuous introduction of new products or permutations on existing ones. The latest is the iPad which is already sold out but not available until this weekend. Another example: the iPhone, only this one is changed from the original and will be sold by Verizon, not AT&T. Close to the same product but different enough to create a new market niche, one served by Verizon. If you own Apple, you have a technology company that is ahead of the competition in many markets and has been for years.

Buying and holding Apple paid off handsomely, even with the volatility. If you bought the stock on January 3, 2000 at $28 a share, you've seen two stock splits (one on June 21, 2000 at 2 for 1, then another 2 for 1 split on February 28, 2005). That investment would have gained 3271% as of this writing. Very few stocks can show that kind of return. It's only available to Buy and Hold investors.

So how can you tell the difference? You can't. No one can. In 2000, Intel had more capital, more market share, more of everything than anyone in the semiconductor business. Apple was still a relative upstart, hadn't invented anything phenemonal recently and didn't look like it would ever take off. But then it introduced several blockbusters, and the rest is history. Intel continues to evolve, but it's much harder for it to bring out new products that will create the meaningful profitability that Apple does because it's in a mature industry where everyone expects a new chip to go X times faster than the last one.

So it's safe to say that Buy and Hold works for some stocks, not all. How do you pick the right ones? It's a matter of evolving your portfolio. You have to start with a diverse group of stocks from several different industries, then allow them to perform. Even one year is a short time frame. When you buy a stock, you're buying a business, and you wouldn't expect a business to be worth a lot more in one year unless it has new products or new markets with much higher revenues. It's the same for stocks.

Give your stocks some time to perform, say at least 2 years (unless they announce some funny business in their accounting or have diminishing sales over several quarters). However, if they continue to grow sales and earnings, no matter what the stock does, these are winners. Keep them. Sometimes the stock market isn't as efficient as theorists would have us believe. Sometimes good stocks are slammed right along with bad stocks. Ignore the noise. Focus on sales and earnings. In the long run, investors will find your good stock.

As for the laggards, you have to be ruthless, paring back the underperformers, the ones that can't grow sales or earnings. If they don't do it in 2 years, they most likely won't change unless they have a new product that's been gestating for that time which will be fully announced long before it's introduced. Otherwise, weak stocks have to go and be replaced with stronger ones.

This last part is the toughest because most likely you'll have losses in the weaker stocks. Taking losses says so many things to an investor but mostly its says: you're wrong. Develop the So What attitude and move on. Keeping weak stocks is the single most expensive mistake investors make. They keep hoping for a miracle that never comes.

The miracle is happening for them, just not in those stocks. It's happening in the strong stocks. Keep those for as long as they perform. Warren Buffett likes to say his favorite holding period is forever. Since he's the most successful stock investor ever, it's probably wise to follow his example.

- Ted Allrich