BUY & HOLD: Challenging Investment Rules and Key Investor Traits

Posted on May 7, 2025 by Dr. David Edward Marcinko MBA MEd CMP™

By Vitaliy Katsenelson CFA

***

***

Today, we’re diving into two thought-provoking questions:

What’s a famous investment rule I don’t agree with? Which key characteristics should a good investor have? Again:

  1. What’s a famous investment rule I don’t agree with?
  2. Which key characteristics should a good investor have?

A Famous Investment Rule I Don’t Agree With: “Buy and Hold”

Buy and hold becomes a religion during bull markets. Then, holding a stock because you bought it is often rewarded through higher and higher valuations. There’s a Pavlovian bull market reinforcement – every time you don’t sell (hold) a stock, it goes higher.

Buying is a decision. So is holding, but it should not be a religion but a decision. The value of any company is the present value of its cash flows. When the present value of cash flows (per share) is less than the price of the stock, the stock should not be “held” but sold.

Warren Buffett is looked upon as the deity of buy and hold.

Look at Coca Cola when it hit $40 in 1999. Its earnings power at the time was about $0.80. It was trading at 50 times earnings. It was significantly overvalued, considering that most of the growth for this company was in the past.

Fast-forward almost a quarter of a century – literally a generation. Today the stock is at $60. It took more than a decade to reclaim its 1999 high. Today, Coke’s earnings power is around $1.50–1.90. Earnings have stagnated for over a decade. If you did not sell the stock in 1999, you collected some dividends, not a lot but some. The stock is still trading at 30–40x earnings. Unless they discover that Coke cures diabetes (not causes it), its earnings will not move much. It’s a mature business with significant health headwinds against it.

“Long-term” and “buy-and-hold” investing are often confused.

People should not own stocks unless they have a long-term time horizon. Long-term investing is an attitude, an analytical approach. When you build a discounted cash flow model, you are looking decades ahead. However, this doesn’t mean that you should stop analyzing the company’s valuation and fundamentals after you buy the stock, as they may change and affect your expected return. After you put in a lot of analytical work and buy the stock, you should not simply switch off your brain and become a mindless buy-and-hold investor.

This doesn’t mean you shouldn’t be patient, but holding, not selling, a stock is a decision.

COMMENTS APPRECIATED

Refer and Like

***

***

Filed under: "Ask-an-Advisor", Experts Invited, Investing, Portfolio Management | Tagged: , , , , , , , , , , , | Leave a comment »

BBD: The Buy-Borrow-Die Tax Strategy for Physicians

Posted on December 17, 2024 by Dr. David Edward Marcinko MBA MEd CMP™

DR. DAVID EDWARD MARCINKO MBA MEd

By Staff Reporters

SPONSOR: http://www.MarcinkoAssociates.com

***

***

Here’s how the Buy, Borrow, Die strategy works step-by-step:

Step 1. Buy Assets

This step, broadly known as the accumulation phase, is about acquiring or creating valuable assets. It’s the most critical step taken by wealthy individuals to secure their wealth. Billionaires, for instance, often created startups that eventually turned into massive corporations. The asset here is the company they’ve established.

However, this isn’t the only way to accumulate assets. For professionals like doctors and lawyers, this phase involves securing a high-paying job and buying assets that have the potential to appreciate over time—like stocks, real estate, and private capital. Once an individual reaches a substantial level of wealth, they can leverage these assets in interesting ways using the next step of this strategy. 

Step 2. Borrow Against Your Assets

This where the assets you’ve acquired are used as collateral to borrow money—all without triggering a taxable event.

Suppose you’ve got a robust stock portfolio. You can then take out a Securities Backed Line of Credit (SBLOC). This kind of loan lets you tap into the value of your portfolio without having to sell off any assets and subsequently paying capital gains taxes. What makes SBLOCs attractive to lenders is the relative ease with which the securities can be seized and sold, making them a low-risk lending option.

The ceiling for such a loan is usually around 50% of your portfolio’s value. However, we often caution against borrowing more than 25% of your account balance, especially for long-term loans. This will provide a cushion against stock market volatility, much like what we experienced in 2022 and 2023.

Borrowing against assets isn’t limited to stock portfolios either. Let’s say you own a home and have built up a certain amount of equity in it. You could opt for a Home Equity Line of Credit (HELOC), using your home as collateral. Banks tend to favor real estate-backed loans due to their stability compared to the fluctuating value of stocks.

Step 3. Die and Pass Your Wealth On

The final step in the strategy is where the proverbial tax baton is handed off to the next generation.

Under the existing tax code, when you pass away, your heirs receive a “stepped-up basis” on the assets they inherit from you. This means that their cost basis—the original amount paid for an asset—is stepped up to the market value of the asset at the time of your death. Meaning once you have passed away, your heirs would be able to sell the assets without having to pay taxes on the capital gain. Imagine you had purchased a building 20 years ago for $1 million and over the years, the value of that building increased to $2.5 million. If you were to pass away at this point, your heirs would inherit the building with the stepped-up cost basis of $2.5 million. This implies that if they decide to sell the property at this valuation, they wouldn’t owe any capital gains tax. This is because for tax purposes, their gain is calculated from the $2.5 million, not the original $1 million.

By utilizing this loophole, families can pass on their wealth without incurring a hefty tax bill. This is why many wealthy families set up trusts – it’s a way to manage and pass on their wealth at a stepped-up cost basis.

COMMENTS APPRECIATED

Subscribe and Refer

***

***

Filed under: "Ask-an-Advisor", "Doctors Only", Experts Invited, Financial Advisor Listings, Financial Planning, Funding Basics, Glossary Terms, Investing, Sponsors, Taxation, Touring with Marcinko | Tagged: , , , , , , , , , , , , , , , | Leave a comment »