The Motley Fool: Carret’s words of wisdom live on for investors

If you’d like guidance from someone who invested for 70 years and beat the market average soundly, meet Philip Carret. He started Pioneer, one of the first mutual funds, in 1928. His average annual return, calculated from 1928 to 1974, is estimated to be 14 percent. That’s pretty impressive, considering that the stock market in general averages only a 10 percent annual return. Carret died in 1998 at the age of 101, leaving behind many thoughts on what contributes to successful investing:

“ “Never borrow money for speculation in stocks. When you do borrow, do so sparingly, and only when rates are low or falling and business is depressed.”

“ “Never hold fewer than 10 stocks covering five different fields of business.”

“ “More fortunes are made by sitting on securities for years at a time than by active trading.”

“ “Reappraise every holding at least every six months.”

“ “Be quick to take losses, reluctant to take profits.”

“ “Avoid inside information as you would the plague.”

“ “Diligently seek facts; advice, never.”

“ “Keep at least half (your investment portfolio) in income-producing securities.” (This would include not only bonds, but also dividend-paying stocks.)

“ “Never put more than 25 percent of (your investment portfolio) into securities about which detailed information is not readily and regularly available.” (We’d suggest that you avoid these securities entirely.)

Other lessons can be gleaned from Carret’s life. It wasn’t one spent with eyes glued to the stock ticker. He made time for things he enjoyed, such as solar eclipses, which he would travel almost anywhere to observe. He was generous with and loyal to friends. When he prepared his housekeeper’s tax return for her, he quietly paid the taxes due, as well. He was a man of principle. Years ago, when a social club at Harvard agreed to accept him on the condition that he “lose his Jewish roommate,” Carret told the club to take a hike.

Carret’s example inspires us to aim for high performance, high principles, and lives with many high points.

Ask the Fool

Q: Is “buy and hold” the best investment strategy? — B.M., Davenport, Iowa

A: There’s no one-size-fits-all investment approach. Buying and holding has worked wonders for many investors, but it’s best thought of as buying to hold. In other words, never buy a stock and then just blindly hold it for years without ever checking up on it. Instead, carefully select promising companies, intending to hold them for the long term as long as they remain healthy and growing.

Many great fortunes have been built by people who held shares of great companies (such as Wal-Mart, Microsoft, General Electric and Coca-Cola) for decades, through ups and downs. Even super-investor Warren Buffett has said that his favorite time to sell is “never.”

Q: If I buy 100 shares at $10 each and the company does a 2-for-1 stock split, how do I value the shares when I sell? — John Morley, via e-mail

A: Let’s say the shares you bought for $10 were trading at $16 before the split, for a total value of $1,600. After the split, you’ll own twice as many shares (200), worth half as much ($8 each), for a total of … $1,600.

My dumbest investment

In the early 1990s, when IBM stock fell from triple digits to the low $80s, I bought 100 shares. Then came more trouble. It dropped, falling all the way to around $40. Amid nothing but bad news, I held on. A few months later, it started rising, and I sold at $56, having had enough. But by the mid 1990s, it was near $115. This goes to show that you must not panic, because all things will turn around.

— Eddie Stack, Brooklyn, N.Y.

The Fool Responds: Not every falling stock turns around. But healthy, growing companies do usually see their stocks recover. Don’t kick yourself about opportunities lost, though. You needn’t latch onto every rising star. Legendary investor Warren Buffett has suggested that we’d do well imagining that we’re issued a single investing punch card for our lifetime, permitting us just 20 investments. Such thinking can help us focus on our best ideas.