The Importance of Buy & Hold

In mid-March 2008, when the market was down 25.85%, I was quietly confident that there shouldn’t be a huge amount of downside left after such a substantial decline.

 

Now, you will note from the above statement, I don’t rate much in the forecasting stakes – the market went on to fall roughly as far again over the ensuing 12 months.  What I can lay claim to is some solid results in the stock-selection stakes.  I found Credit Corp Group (ticker – CCP), they seemed to tick a lot of the boxes I seek, reasonably long and consistently profitable trading history, high return on equity, averaging over 25%.  Their only issue would seem to have been that they were far too heavily leveraged at a time when such leverage was frowned upon due to seizing credit markets.  A quick perusal of their business and their cash flows, however, indicated that if they committed seriously to paying down their debts, they could do so in pretty short order – they did and they have (cut by roughly 2/3 in the next 2 years).

 

So I bought a small parcel of CCP @ 66 cents 14/03/2008 (it is not a big holding, today they make up less than 4% of the family portfolio).  In pretty short order, they hit 99 cents (up 50% on purchase price), and then they bottomed at 39 cents on 28^th January 2009 (down 40.91% on my purchase price).  All this indicates is that it was a volatile period; those of you in the market then will already know this.

In any case – as at the time of first drafting this post (20/12/10), CCP is priced at $4.05 and they have returned me 14 cents in dividends since purchase.  So they represent $4.19 of value to me today, which equates to an annualised return of 95.83%.  I don’t point this out to gloat; I have made a couple of purchases that worked out better & a great many that did not nearly so well (doing not nearly so well as 95.83% can actually be quite satisfactory).

 

In truth, the point I want to make regards the ‘buy & hold’ ethos.  I make the point as follows – In order to maintain my annualised growth of 95.83% on my original 66-cent purchase price, CCP will need to grow my investment by 63.25 cents per year (.9583 x 0.66).  This means that to get to 20/12/2011 still carrying my return of 95.83% pa (on original purchase price), I need CCP to finish the year at about $4.68 (including dividends).  Now this only represents a return of 15.62% from their current position. This is only a little more than 3% above the historic market (S&P/ASX200 TR) return, and entirely possible from this company.

 

The table set out to the left further demonstrates this proposition stretched out for the next 10 years.  You will see that by the 10^th year, the required return (assuming a smooth return of 95.83% per annum on my original investment) is only 6.49%.  I can go out today and get a 6.5% return from any number of places, so that will be eminently achievable.