As an investing strategy, buy and hold has never been more suspect. Giant companies now collapse in scandal, like Enron; fall woefully behind in technology, like Polaroid; succumb to litigation, like Halliburton (asbestos); or get whacked by overpriced deals, like AOL. Are there still stocks that you can throw in a drawer and sleep well for years? Or has investing got so hopelessly complicated that individuals shouldn't try to go it alone?
TIME senior writer Daniel Kadlec questions five pros: Ron Baron, manager of Baron Asset Fund; Eleanor Blayney, a financial planner at Sullivan Bruyette Speros & Blayney; Eric McKissack, a manager at Ariel Mutual Funds; Gary Pilgrim, president of PBHG Funds; and Gus Sauter, manager of the Vanguard 500 Index fund. Our panelists agree that diversified mutual funds are best for those with little penchant for serious stock research. For investors who want to buy individual stocks and are willing to do some homework, our pros offer tips on what to hold--and when to fold.
TIME: Greedy, deceitful managers like those at Enron pose a risk for buy-and-hold investors. How do you defend against dishonesty?
PILGRIM: The kind of problems we're talking about with Enron--at large companies--is a fairly recent development. But routine efforts to stretch the financial truth, particularly among small companies, have been going on for a long time. It gets down to basic honesty and integrity. Some managements have a strong sense of that, and others don't. Combine that with a flexible moral framework with stock options, and over a period of time the focus has increasingly shifted to how rich can you get, how fast? The ploy is to keep expectations rising. But at some point the business won't support the expectations, and that's when the cheating starts.
TIME: The spread of this behavior to large companies really undermines the buy-and-hold philosophy, since these are just the companies investors believe are safe.
PILGRIM: I agree. It has trickled up and become more complex.
SAUTER: The other thing that's been going on for years is managing earnings quarter to quarter to make it seem as though business is on a nice, smooth, upward slope.
TIME: But managed earnings can be good, right? At least people thought that way about General Electric for decades.
BARON: I don't think it's a good thing. That's not the way business works in the real world, and anyone who reports earnings at a predictable pace every single quarter, every single year is probably using practices that are questionable.
TIME: Would you stay away from GE for that reason?
BARON: Yes.
TIME: Eleanor, what do you tell clients about managing company stock and stock options to stay away from a disaster like the one that befell Enron employees?
BLAYNEY: Long before Enron came along, we were arm wrestling clients to divest, first in their 401(k), then on their options. That's a constant challenge as a planner, to get them to unload their company stock. They believe in it.
TIME: Options are tricky. You don't want to exercise and sell the minute you have a 2-point gain. What's the right formula?