Buy-and-hold stock strategy can be big loser in bear market

Buy shares of good companies and hang on. That's the way millions of investors have been trained to almost religiously invest for the long haul. Even Warren Buffett likes to say his favorite holding period is forever. But this seemingly common-sense approach, which has worked remarkably well over the decades for patient investors, proved extremely treacherous during the bear market. Investors holding onto some well-known stocks saying "they will come back" often found themselves holding onto stocks with next to no value.

Since the start of the decade, shares of 25 U.S. companies that had market values of $4 billion or more are now trading for $2 or less, according to a USA TODAY analysis of data from Standard & Poor's Capital IQ. Half of those were even booted from a major stock exchange and now trade on lightly regulated markets.

General Motors was the most recent example. Shares of the hallmark of American enterprise traded for nearly $73 a share on the New York Stock Exchange in 2000. Now, GM trades for less than $2 on the Pink Sheets market.

That's what makes this twist so shocking. Household-name companies, several with massive market values, seemed to be exactly the kinds of stocks to safely hold long-term. But many of these well-known stocks ended up crashing like fly-by-night penny stocks. The list of other stocks investors rode down to practically nothing includes financial firms American International Group, Fannie Mae, Freddie Mac, Washington Mutual and E-Trade, technology stocks including Level 3 Communications and Conexant Systems, and retailer Circuit City.

The market's vicious kicking the life out of stocks has been a brutal wake-up call for investors who long held out faith that holding on is the only way to go.

A painful lesson to learn

John Canelake, 88, long taught his children that patient, long-term investing was the way to go. As the founder of candy store Canelake's Candies in Virginia, Minn., Canelake has watched the value of his stocks rise and fall but found sticking with them through the ups and downs almost always paid off.

Not this time. Canelake invested in Great Western in 1980 and saw his holdings hit $80,000 after the bank was bought by Washington Mutual. Now it's worth just $200. "I was in the habit of (buying and holding stocks)," Canelake says. "I don't think it's so good now."

In many ways, riding a stock down as it plummets is part of human nature, says Robert Shiller, finance professor at Yale. Humans dread facing regret over a bad decision. People will go to great lengths to avoid or postpone the feeling that they made a mistake, he says. "People are highly motivated by avoiding the pain of regret," he says.

"The problem with selling stocks when they're going down is you're forced to confront the fact you were wrong," he says. "You can avoid the pain of regret, or postpone it, hoping a stock will come back."

The implosion of banks such as Washington Mutual was especially hard for many individual investors to take. Not only have bank stocks been traditionally relatively stable, but some investors had the added comfort of being the banks' customers.

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