Warren Buffett’s buy-and-hold-forever investment style has gone out of fashion in recent decades.
This is not only because it’s easier to jump in and out of stocks for next to nothing (it’s now literally costs nothing for many investors in the U.S.), but because the new age of technological disruption has effectively made the strategy outdated for all but the “moatiest” of firms.
A lot of wide-moat firms of yesteryear are having the strength of their moats put to the test, with hungry up-and-comers looking to steal share across almost every non-regulated industry. A lot of traditional firms that had wide moats 10 years ago now have no moat whatsoever due to tech-driven changes to the industry landscape and a failure to adapt to said changes.
That’s why it’s vital to continue doing your homework with the stocks you already own to ensure your original investment thesis still holds and that the moat you supposedly bought is still as wide as it was when you hit the “buy” button.
Consider Cineplex (TSX:CGX); the Canadian movie theatre kingpin has endured some tough times over the past few years thanks to the continued rise of video streamers. The company essentially had a dominant position in Canada’s movie theatre scene, a market that was monopolistically competitive.
Fast forward to today, and the stock now sports a 7.1% dividend yield with shares down over 53% from its all-time high levels.
What happened to Cineplex’s moat? It may have gone the way of the Dodo bird, given the profound change in how most Canadians now consume films and various other forms of video media.
Fortunately, Foolish readers were warned before Cineplex stock fell off a cliff.
Back in the summer of 2017, when all was well with the dividend heavyweight, I’d urged investors to sell the name because of the long-term secular headwinds facing the business and the stock’s absurd overvaluation, which I thought warranted a crash.
As it turned out, I was right with my strong sell call — not because I had a crystal ball, but because I was one of the few who wasn’t willing to pay a massive premium for a name that I thought had deteriorating fundamentals and a bad case of moat erosion.
Paying over 30 times earnings for a name that I saw as having, at best, flat growth just made no sense to me.
Many Canadians have gotten rich off the name with the big dividend hikes and capital gains in the years prior to its collapse, but those who continued to “pay up” just because of past performance, without doing any further homework, ended up surrendering most, if not all their gains, as the Cineplex story changed drastically.
That’s why investors need to stay informed with their holdings and not just “buy and forget” in this era of profound technological disruption.
If you’re going to buy a stock for your TFSA, don’t buy and hold forever. Buy, hold, stay informed, and sell if the story changes for the worst.
Stay hungry. Stay Foolish.
