How to "Buy and Hold" investors actually make an income?

Question

I am not saying that this is a bad way to invest. This is actually the way I have decided to invest after reading loads about Warren Buffet etc.

But I have been wondering how guys like buffet managed to get the money to invest in new companies if he didnt sell? And how did he earn a living.

I am asking this because I have been buying shares for a while now and I am expecting to hold them for a long time. But when do I actually earn an income?

Dividends are a slow way to get a good income and I would have to invest hundreds of thousands of pounds to get a decent level of divident income.

I am getting LOADS of really good answers here and its extremely hard to pick the best one. I have extended the experation on the question because I would love to see some more answers on this.

Answer 1

The principle of 'buy & hold' investing is to let your investment grow over the years. It's comparable to compound interest. It should be reviewed periodically, if you decide to sell an underpreforming stock, the yield should be reinvested in some other stock to keep your investment growing.
If you're looking for investment income you should invest in dividend producing stock or interset yielding bonds. You can combine the two by investing a part of your cash in long term investments and part in interest or dividend paying investments.
As far as Warren Buffet goes, you have to realise that you and Mr. Buffet are not in the same league. Mr. Buffets practices are not necessarily advantages for you. Most likely his actions are motivated by cirumstances not related to you.
(Tax considerations, transfers of liquidity, etc.) another point you might want to consider is that Mr.Buffet ownes Geiko insurance, which is his cash cow, and which generates tons of cash for him. Most of us depend on incomes which are infinitismal compared to Mr. Buffets income to fund our investments.
As far as dividend or trust unit income goes, if you do due dilligent research, you'll find stable companies and / or trusts that pay around 15% anually. (100,000 will returm approximately 1,000 monthly).

Answer 2

buy and hold is not an income investment strategy.
Income is when you realize your gain.
You realize a gain buy selling your position or part of your position. Dividend income is most always very small for common stock.
If you bought and held the s&p 500 your income would be about 3%+/- from the dividends. About 7% would be a gain on paper only until you sold it.
It is the terminology that confuses you.
Warren Buffet did not derive his Income from buy and hold. He received income from his job. his job is to create wealth through investments, quality investments that were worth holding. For this other people gave him money to invest and he took a small part of it as income. At least once a year you need to look at the investment you made and ask yourself you would would still buy it. He became a billionaire by owning companies.
What is a decent level of dividend income? That has no meaning really.
Asking questions like these I would give you the advice to stay out of the markets, at best stick with mutual funds and be well diversified.

Answer 3

Well you sound like a sharp tack so I'll let you in on a secret. Aside from dividends, which some companies pay well in and others only mere pennies; investors will reinvest those dividends into the stock. Yeah it takes a lot of shares and a long time in a side ways market to get anywhere.

Buffett had it easy, from 1942 to 1964 the US market was in a steady up trend. From 64' to 82' there was some side ways movement kinda like what we've had lately. In 1982 it took off again in a steeper upward trend than that from 42' - 64'. With the acceptation of the crash of 87' this upward trend lasted until 1999. Since then we have most defiantly been in an up and down sideways trend.

You can't get rich in these kinds of up and down trends holding long and counting dividends each quarter. You need to learn trend trading. Buy on the bottom of dips, re-accumulate. Each time that stock price drops down buy more of it. Buy, buy, buy! When the market strengthens and trends upward again you will have accumulated more shares and have a stronger position. It’s ok to sell off some shares and lock in a profit too.

And then there are options. Another tool Buffett was able to cash in on. When options came around in the early 70's it gave the average investor 'leverage'. Leverage allows you to hedge against loss with protective PUTs and obtain greater gains through optimistic CALL's. Options give the investor control over 100 shares of stock (one contract). They have the option in the contract to buy or sell stock that they do (covered CALL or PUT) or do not (naked CALL or naked PUT) own. A combination of these strategies with some education and in some cases luck, it is very possible to rake in some real dough.

Answer 4

It is important to remember on buy and hold that you are buying this company for life, if you take buy and hold totally literally. You are marrying it and you cannot get a divorce.

So PICK CAREFULLY. As Warren Buffett once remarked, "I look at stocks as though I am a professional basketball coach. If I am walking down the street and a five foot tall guy comes up and says they are talented, I wish them well and go on. But if I see a seven foot tall guy, then I have a conversation."

You should look closely and if you find nothing, walk away. Great investing is often doing nothing, including not buying.

Answer 5

Buffett owns many of those companies outright, through Berkshire Hathaway. Berkshire gets the earnings.. And he uses that to reinvest in other companies for Berkshire.

Buy and hold investors can make an income from dividends and interest from bonds, or they may reinvest it. If they reinvest it they arent expecting an income from it now, When they do need it they may start taking dividends and interest and sell some of it and convert it into more bonds money market accounts and fixed income investments, which are safer and produce income.

Answer 6

buy and hold is the recommended method. BUT in turbulent markets I do have stops on my orders to protect my gains. Once it hits it fine no problem. i'll just wait or buy something else with it. Buy and hold is good as well because it could give you a tax break (not sure what tax laws are in the UK) meaning higher taxes for selling at a profit less than a year as opposed to a profit over a year.

Buffet is wise he looks for particular stocks and he does sell them when he thinks they need to be sold. He has lots of assessts as well.

Making a living in the market is NOT easy. If you are small like me you build it over time with the occassional quick trade on a stock you like and fell it is going in the right direction. I also look long term and find affordable securities with a very good expense ratio. I started with mutual funds and migrated up to ETF's and made a few moves today with varying degrees of success but i am very comfortable with these three I have now. (CWI, PWJ and IPE) I also have saving accounts with online banks to get the better yield on them.

But yea your assessment is correct you need money to make money.

Answer 7

by way of holding the shares, the value of the stocks go high. in the long term they will sell a part of their shares which will be equivalent to their principle amt what they were invested in that stock .

Answer 8

A lot of mutual funds offer mortgage back securities (also called MBS). And sometimes, they are in traditional bond funds.