Warren Buffett (Trades, Portfolio) always says: “Our favorite holding period is forever.” Many investors who are not patient enough often ask themselves why Buffett does not sell at the top and buy at the bottom. He did buy and sell, for many stocks and other financial instruments, because of what he calls opportunity cost. But with most of Berkshire Hathaway’s (BRK.A, Financial) (BRK.B, Financial) cash on hand, he prefers to buy just to keep, despite the large fluctuations in the stock market price.
Indeed, I have made some money on buying and selling. I often bought at the dip when the companies announced weak earnings and/or they just experienced a sudden drop in the stock price without any reason, but their earning power still remained. And I sold when its stock rebounded significantly. However, I realized that much more money would have been made via buying and holding.
I regretted not buying Google, now Alphabet Inc. (GOOG, Financial), when the 2008 financial crisis hit the global economy. Its share price hit the $130 per share range in November 2008. At the current price, its share price was $730 per share, delivering an “easy” annual return of nearly 28% in the past seven years. In 2008, Google had few obligations, generating $6.35 billion in free cash flow, with the enterprise value to free cash flow ratio of 12.9x. Even if investors bought Google at the peak in 2007, at $356 per share and held it until now, they would make an annual return of 9.4%.
In 2015, Google has experienced strong growth in both top line and bottom line. Its segment revenues rose by 13.5% to $74.5 billion while its operating income jumped from $19 billion last year to $23.4 billion, a growth of 23.1%. In 2015, Google’s free cash flow came in at $16.1 billion. At the end of 2015, it had $73 billion of cash and marketable securities on hands and $10.58 billion of debt and other compensations and benefits. At the current market cap of $508.62 billion, its enterprise value stayed at $446.2 billion. Thus, the enterprise value to free cash flow ratio is a bit high, at 27.7x. As Google is considered one of the most innovative companies on the globe, under the leadership of Larry Page and Sergey Brin, I think Alphabet will definitely be worth much more over time.
Amazon
I also regretted not buying Amazon (AMZN, Financial). At the peak of 2007, Amazon traded at nearly $95 per share. In the 2008 financial crisis, it dropped to nearly $38 per share. If investors bought Amazon at the 2007 peak and held it until today, they still generated a high annual return of 24.15% in the past eight years. Even if investors bought Amazon in the dot-com bubble at $95 per share in 1999 and had enough courage to keep it until now, they still had a decent annual compounded gain of 10.7%, much better than Standard & Poor's 500’s return of 1.76% in the past 17 years.
In 2007, Amazon’s free cash flow was at $1.16 billion. With the enterprise value of $36.8 billion, its enterprise value to free cash flow was at a hefty valuation of 31.7x, right before the collapse. In 2015, Amazon generated $5.64 billion in free cash flow. At $536.3 per share, Amazon is worth $272.64 billion in enterprise value. Thus, the free cash flow multiple is 48.3x, much higher than the valuation of 2007 peak. Nevertheless, Amazon has the possibility of raising prices of its services and products without the decline in customers’ demand. Under the leadership of Jeff Bezos, Amazon has kept its price low to gain a loyal customer base and invested into building the infrastructure in the technology service sector. I admire Bezos’ philosophy of sacrificing short-term gains for long-term benefits. The investment in Amazon is definitely a bet on Bezos’ leadership.
