Is It Time To Let Go?

As an investing strategy, buy and hold has never been more suspect. Giant companies now collapse in scandal, like Enron; fall woefully behind in technology, like Polaroid; succumb to litigation, like Halliburton (asbestos); or get whacked by overpriced deals, like AOL. Are there still stocks that you can throw in a drawer and sleep well for years? Or has investing got so hopelessly complicated that individuals shouldn't try to go it alone?

TIME senior writer Daniel Kadlec questions five pros: Ron Baron, manager of Baron Asset Fund; Eleanor Blayney, a financial planner at Sullivan Bruyette Speros & Blayney; Eric McKissack, a manager at Ariel Mutual Funds; Gary Pilgrim, president of PBHG Funds; and Gus Sauter, manager of the Vanguard 500 Index fund. Our panelists agree that diversified mutual funds are best for those with little penchant for serious stock research. For investors who want to buy individual stocks and are willing to do some homework, our pros offer tips on what to hold--and when to fold.

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TIME: Greedy, deceitful managers like those at Enron pose a risk for buy-and-hold investors. How do you defend against dishonesty?

PILGRIM: The kind of problems we're talking about with Enron--at large companies--is a fairly recent development. But routine efforts to stretch the financial truth, particularly among small companies, have been going on for a long time. It gets down to basic honesty and integrity. Some managements have a strong sense of that, and others don't. Combine that with a flexible moral framework with stock options, and over a period of time the focus has increasingly shifted to how rich can you get, how fast? The ploy is to keep expectations rising. But at some point the business won't support the expectations, and that's when the cheating starts.

TIME: The spread of this behavior to large companies really undermines the buy-and-hold philosophy, since these are just the companies investors believe are safe.

PILGRIM: I agree. It has trickled up and become more complex.

SAUTER: The other thing that's been going on for years is managing earnings quarter to quarter to make it seem as though business is on a nice, smooth, upward slope.

TIME: But managed earnings can be good, right? At least people thought that way about General Electric for decades.

BARON: I don't think it's a good thing. That's not the way business works in the real world, and anyone who reports earnings at a predictable pace every single quarter, every single year is probably using practices that are questionable.

TIME: Would you stay away from GE for that reason?

BARON: Yes.

TIME: Eleanor, what do you tell clients about managing company stock and stock options to stay away from a disaster like the one that befell Enron employees?

BLAYNEY: Long before Enron came along, we were arm wrestling clients to divest, first in their 401(k), then on their options. That's a constant challenge as a planner, to get them to unload their company stock. They believe in it.

TIME: Options are tricky. You don't want to exercise and sell the minute you have a 2-point gain. What's the right formula?

BLAYNEY: Generally, options are leveraged so they're better to be held, but there comes a point where you have to be prudently diversifying rather than running them to the last day in the holding period.

TIME: So you urge people to average out, to sell in regular increments?

BLAYNEY: Yes.

TIME: Are we at a point when individuals should just concede they don't have the time it takes to research stocks and should stick with mutual funds?

BLAYNEY: Not necessarily. We may be overlooking the obvious: How do you encapsulate an Enron? That's a company-specific risk, and without spending more time, you offset that kind of risk through diversification. I'm not going to pore through vast disclosures. I'm going back to basic advice.

SAUTER: If they are going to invest in stocks themselves, it's got to be a really strong avocation. Three-quarters of all professionals underperform their benchmark. It's hard to believe individuals are going to outmaneuver professionals.

TIME: Another risk is companies, like Kodak, where technology overtakes them.

PILGRIM: The nifty fifty [big stocks that were popular in the 1960s and '70s] are still dying, one at a time.

TIME: That's right. How do you know when the growth story is over?

PILGRIM: Pay attention to how sales and earnings are doing. If a company goes into a steady decline, like Kodak or Polaroid, you'll have many opportunities to observe that things are changing. Yes, there are bombshells when you wake up and your stock is down 40%. But there are many more cases of companies whose growth characteristics gradually begin to change. I don't think individuals have any business buying stocks. They don't know how to diversify; they don't know how to follow them. I think they should adopt a buy-and-hold strategy for a group of mutual funds and spend the rest of the time trying to improve themselves on their job.