Whenever you hear that the best strategy to make money is to buy a good stock and hold it, here’s a great story that was told by Art Cashin.
The color-TV mania was memorable for a glimpse into one of the greatest manias of all time – 1929, for which I was not around. The color-TV stocks had soared and Radio Corporation of America (RCA) was one of the best performers. It was 1968 and I was alone in my office about 6:00PM when an elderly man saw that I was alone, came over and then said he wanted to sell some stock. He gave me a stock certificate for 100 shares of RCA. He said he was finally breaking even and had refused to sell it at a loss. I asked him about when he had bought it. He answered 1928 – 40 years to break even! He was lucky, there had been over 600 radio set companies at the time, and only a few had survived the Depression. But that was 1928, only a prelude to the supermania of 1929: RCA stock more than tripled that year. If someone had bought at the top, even with RCA being taken over by General Electric, the loss today from the 1929 peak would have been over 50% – 84 years later. And this was a survivor – how many hot Internet stocks of the late 1990’s have survived to now?
There are two lessons to be learned from this story. First, too many people refuse to sell a stock in which they have a loss. That is one of those psychological problems that inhibit amateur investors from making money. The right course is to keep small losses from becoming big losses. The second lesson is that the “buy and hold” strategy ignores the rapid changes that are taking place all over the economy and the world. Companies and even industries become obsolete or fall on hard times. You don’t want to ride GM, K-Mart, Kodak or Fannie Mae into bankruptcy.
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