There are No Forever Stocks
Updated: Jun 10
5 Stocks You Can Buy and Hold Forever
In an effort to get a click, a read, and a share, websites that focus on investing all have the article or blog post with the title, "5 Stocks You Can Buy and Hold Forever" or "3 Stocks You Can Hold Forever." The number of stocks may vary from website to website, and the wording may change slightly, but they're all saying the same thing. I'm here to warn you that there are no forever stocks.
Every company has its day, and smart investors recognize this and try to profit from a company's time in the spotlight. Good investors also understand that the spotlight doesn't shine on a company forever, and to maintain investment profits it's important to move on from a company before the spotlight does.
The current market is filled with very strong companies. Apple (AAPL), Amazon (AMZN), Google (GOOGL), Microsoft (MSFT), Netflix (NFLX), Tesla (TSLA), and Facebook (FB) just to name a few. These companies are currently industry leaders, and replacements of previous industry leaders.
In the late '90s the personal computer industry belonged to Compaq, then to Dell as the '90s ended. In 2001 Apple introduced the iPod, and then the iPhone in 2007 and the company never looked back. Compaq merged with Hewlett-Packard in an attempt to stay alive and Dell went private in 2013. In the mid '90s, with access to the internet spreading across the world, Compaq seemed like a buy and hold forever stock, it wasn't.
In the 80's and 90's handheld personal communication was Motorola's (MSI) bread and butter. From Sky pagers to the StarTac cell phone to two-way pagers, the company was the innovator of its day. Then Research In Motion introduced the Blackberry, and it took a while to catch on, but once it did Motorola was no longer the industry leader.
"Only way to roll, Jigga and two ladies / I'm too cold, Motorola, two way page me, c'mon" - Jay-Z "I Just Want Love U (Give it to Me)
Apple's iPhone eventually put the nail in Motorola's coffin and turned Blackberry into a cyber security company. Another example of industry leaders becoming almost irrelevant. In fairness, Motorola has continued to be a solid company, but its dominance in personal communication products is all but over.
The number one retailer in American for decades was Sears. Sears is where most of America went for all of its needs, clothes, family pictures, a refridgerator, a washing machine, tools, a lawn-mower, Sears was the place.
In 1998 Sears reported $41.5 billion of revenue, in 2018 the company reported $16 billions of revenue. In 1990 Sears appeared to be a forever stock, by 1999 Sears was being removed from the Dow 30 and being replaced by Home Depot.
In the 20 years between 1998 and 2018 Sears' revenue declined by 61%. In the same time span Amazon's revenue grew from $610 million in 1998 to $232 billion in 2018. Any investor who believed Sears would forever lead the way in retail, lost money on their Sears investment and may have missed the boat on Amazon.
There are dozens of stories like the ones above, where a once dominant company gets replaced. It's why investors can't think of any stock as a forever stock.
If you are currently investing, every company in your portfolio is leading an attack on a competitor to gain more market share or defending an attack against the companies trying to take their market share. Eventually the attackers get better, wiser, stronger, and the defenders get weaker. Strong attackers and weak defenders brings us to a changing of the guard.
Buying a company today with plans of holding it forever implies that you believe the company you own will be able to ward off attackers forever, and that's simply not the case.
Buying a stock, setting it and forgetting it, with the hopes to look at it when you retire is a dangerous game, and one we recommend you do not play. Investing in individual companies takes active management.
By active, we do not mean checking the stock price every day or every week, that's a bit too active for anyone who doesn't personally manage money. But as an investor there should be time that you set aside, maybe every quarter, maybe every six months where you do a review of your portfolio.
If You Have to Have a Forever Investment
If you want to invest on your own, but don't have the time to actively manage a portfolio and you need a forever investment, there are options. Buying an index fund like the SPDR S&P 500 ETF Trust or SPY. The SPY tracks the S&P 500, which is an index that encompasses the United States top 500 companies.
Earlier I discussed when Sears was removed from the Dow Jones Industrial Average and replaced with Home Depot. Because index funds like the SPY are designed to keep pace with an index they will also swap out underperforming companies for better investments.
An index fund is the closest thing investors will get to a buy it and hold it forever investment in the stock markets, but this luxury comes with a cost. Index funds do carry fees on top of any commissions that investors pay for buying and selling the shares. These fees can eat into profits over time.
Don't Fall for the Forever Stocks Trick
Unfortunately, there are no buy and hold forever stocks. The best stocks today will likely be the dogs of the market tomorrow. The closest an investor can get to a buy and hold forever stock is buying an index fund. Because index funds are actively managed, underperforming stocks are constantly being replaced by stocks that will yield better returns in the future.
If you think about holding a stock forever remember the tales of Sears, Compaq, Motorola, and Research In Motion/ Blackberry. All industry leaders at one point in time, all but Motorola struggling to stay alive today. Nothing good lasts forever, not in life, not in the stock market.