LTBH vs Cyclical – When LTBH doesn’t Work

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Like so many things regarding the task of Investing, it really isn’t easy to do in practice but if you can find those relatively rare ‘Long Term Buy & Hold’ (LTBH) Stocks, that just have a habit of going up year after year and also paying you a decent Dividend, then you will have a very easy and very prosperous life (especially if you slam some Leverage on it as well but that’s another matter !!).
 
To an extent I am looking for Stocks like this but in practice I recognise that apart from the fact they are not too common, they tend to do well for a few years and then the performance drops off. The ones that have pretty much risen for 10 years or more are exceptionally rare.

It just occurred to me that there are sectors that have just gone up and up for nearly 20 years and those are the ones that are red hot at the time of writing this Blog in August 2020, and the ones I am thinking of are Health and Technology.
 
I have been lucky with these because I had a Unit Trust in Health and also one for Technology, and I held them for probably 18 years or so and then more recently, I wanted to take this exposure into my iDealing ISA (I held them in ISAs but outside a ‘self-select’ wrapper) and I bought Polar Capital Technology PCT and Worldwide Healthcare WHH to replace them and they have continued to do well for me. Of course, I now regret that I didn’t buy as much as I had before when they were Unit Trusts and that has not worked out in my favour…….
 
Anyway, where was I? The point is that yes it is really difficult to find true LTBH Stocks, but if you can get a few then they are a big help to your returns, and also some Sectors can do a similar job. On top of this, when you just look at the long-term Chart of the S&P500 or other Indexes, they have pretty much gone up over time. Unfortunately, this is not guaranteed and I suspect you are better off sticking with Sectors like Health and Tech which have obvious drivers as Mankind gets continually more cleverer and the population grows. Perhaps some of these ‘Green’ Environmental Funds could be a good long-term Sector tuckaway.
 
I am really meandering on this Blog but I am doing the usual schoolgirl error of not having a plan and just attacking it thinking it will be a quick and dirty one !!
 
So, what I am driving at is that if you can find some LTBH Stocks then they are fantastic news and because you can just hang on to them and they grow and grow, you also have low dealing costs (pretty much very few £s as once you have bought, perhaps in a few chunks, you are then in the game and you just need to maybe TopChop now and again if the position grows and you get a bit uncomfortable) and they are low activity so you can be sat in the Pub !!
 
Unfortunately though, some Stocks will just never behave like these excellent LTBH Stocks and these are really what I would classify as ‘Cyclicals’. In other words, they can appear to be excellent Growth Companies and you might think that they can keep growing over years and years like a true LTBH Stock, but the catch is that they will often let you down and they fall hugely when the Economic Environment goes smelly.
 
A brilliant example of a Cyclical Stock like this is Easyjet EZJ. Obviously at the moment with the C19 Pandemonium going on EZJ is having a very tough time, but for many years it has had many of the features of a Growth Stock but underneath it is still a Cyclical. You need to watch out for this.
 
Being a Cyclical is not necessarily a problem as long as you recognise it and realise what you are holding, or perhaps thinking about buying. For example, EZJ regularly over the years has had many big swings where it would go from perhaps £10 a Share up to £18 or something (those are just example prices to illustrate my point, the exact range is probably a lot different to that) and it was very easy to see these swings on the Long-Term Charts and to see where Buyers came in and where Sellers got the upper hand.
 
The wise thing with Cyclicals is to play these ranges. One way of doing this is to keep a ‘Rump’ Holding that you intend to always keep and then to Buy more and Sell chunks as the thing swings around. Obviously you shouldn’t over-trade and do this too often and you need to be patient and cognizant of the damage you can inflict on your own Portfolio by doing too many Trades when you could get a better effect by doing less but putting more effort (and patience !!) in to getting your timing and sizing as good as you can.
 
You have to be careful with Income Portfolios as well. For myself in my Income Portfolio (if you go to the ‘Portfolios’ page on my Website you should be able to see what is in my Income Portfolio – I’m pretty sure that page is on WD1), on the whole I try not to have too many Cyclical Stocks because of the risk that they will have tough times and the Shares will fall a lot and worse still, they may cut the Dividend. Part of the reason I have my Income Portfolio is to add to Diversification because the hope/plan is that it will move a bit differently to my ‘Normal’ Portfolio which holds the WD40.
 
In my Income Portfolio I hold HSBC Bank HSBA and with hindsight now I rather regret having it in there. I am a bit of a dumb arse loon really because I have always known that Banks are highly cyclical so it should not be a surprise to me. Blame it on my inexperience !!!
 
It’s not necessarily a disaster to have Cyclicals in an Income Portfolio but I would suggest that you limit them and you are a bit careful about it. For example, I suspect many people had Persimmon PSN in their Income Portfolios and for many years they have had strong Capital Gains and huge Dividends – but now with the Virus the Shares have been whacked and a lot of that gain and Income will be wiped out. You pays your money and takes your choice……
 
Some while back I wrote a Blog about a simple 3 Categorization for Stocks and how if a particular Stock doesn’t fit in one of these 3 boxes – of Growth, Income or Recovery – then there is probably not much point in holding it. However, I guess we can overlay the Cyclical aspects over these 3 Categories as they will be relevant. The obvious example would be a of Stock that has been beaten up due to the Economic backdrop, that is then likely to be a very good Recovery Stock as the backdrop improves.
 
You can find that Blog here and you might find it a useful framework for your thinking:
 
https://wheeliedealer.weebly.com/educational-blogs/3-simple-stock-categories
 
Hopefully that all makes sense, and just to round off, some possible examples of great LTBH Stocks that I hold are:

• Astrazeneca AZN
• Telecom Plus TEP
• igIndex IGG
• GlaxoSmithKline GSK
• Primary Health Properties PHP
• Hipgnosis Songs Fund SONG (quite risky maybe)
• Clinigen CLIN.

 
I’ve chosen to list Stocks I hold simply because it was quick and easy for me to think of them !!
 
OK, that’s it for this one,
 
Cheers, WD.
 
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Related Blogs
The Blog Series below is rather an epic but it is very relevant to the idea of Over-Trading and the Costs of doing this (which most people totally fail to realise and are very much a result of timing inefficiencies). If you go to the bottom of it you can find Links to the earlier parts:
 
https://wheeliedealer.weebly.com/educational-blogs/certain-uncertainty-control-what-you-can-control-and-moving-into-cash-part-6-of-6
 
The Blog below is very much about holding LTBH Stocks – this is Part 2 but there is a link to Part 1 at the top of it:
 
https://wheeliedealer.weebly.com/educational-blogs/how-to-hold-for-the-long-term-part-2-of-2