PDA

View Full Version : Buy a good company at a fair price and hold it.


Steve
03-12-2011, 06:38 AM
Investor Warren Buffett is a big proponent of buying a good company at a fair price. In fact he is often quoted as saying that he would rather "buy a good company at a fair price, than a fair company at a good price."

The importance of buying a good company at a fair price and holding it is two fold.

First if you hold onto a stock for at least 5 years, Buffett likes to hold onto them for at least 10, you will benefit from the power of compounding. For every year that good company grows by a certain %, it is increasing all previous increased value of growth by that %. And this happens every year as long as the company is growing at a steady %.

So say for instance your good company brought you a 9% rate of return each year. Your initial investment will double in 8 years!

The longer you leave your money in a good investment, the faster it grows!

Secondly, if you hold onto your investment for at least a year before you cash it in, your tax liability on the profits you make, can drop drastically. Capital gains tax on stocks held less than 1 year are equal to your income tax bracket which can be as high as 35%+. While the same tax liability on profits from a stock held over a year's time maxes out at 15%.

The logic behind this is to encourage you to buy and hold your stocks. If you buy and sell stocks in periods of time less than a year, you can really take a financial hit not only on your brokerage fees, to process these stock purchase, but also you will more than likely pay higher taxes on any of your earnings. Furthermore, you will not benefit from the power of compounding.