While catching a Mad Money a couple of weeks ago, Jim Lemming, er Cramer, gave his dollar dittoheads some invaluable advice on the evils of buy and hold. Buy and Hold is bad, according to our momentum maven.

The way that the Big C framed it, you can hold on to stocks too long, and it will cost you because you didn't sell on the peak. 

First, what he should have told you: Buy and Hold does not mean buy and hold forever.

All stocks are cyclical in nature.  The question about the length of your buy and hold has to do with returns and with which cycles, the short-term, medium-term or long-term, you are interested in as an investor.

If you are in a bank stock, the dogs of the industry at the moment, and it is paying out, even with reductions in dividends at the 5%+ range, are you better off holding through the longer macro cycle and being rewarded short-term with the dividend, and long-term with the swing back to profitability in the sector and the company?  Probably.

Some wide moat stocks picked up on the cheap are hard to replace, and their cycles are longer.  GE, P&G, and other mega corps are behemoths that don't get a lot of fast run-ups unless they have a smooth-talking Jack Welch nuancing the analysts into economic ecstasy.

There are companies like the oil transporters, that, short of oil becoming obsolete, will produce exceptional dividends and whose market appreciation remains within a range that has improved and should, given the scarcity fears of the market, stay that way for some time.

You buy-and-hold in some of these companies for the long-haul because historically you make more money that way. Friends of Jim make money when you buy and sell, and think B&H boring. Personally I would rather have them all snoozing away.

A very compelling reason to hold are the tax benefits. When you buy and sell in a stock repeatedly, the government and the brokers eat away at your profit. Having the discipline to hold within a 3 to 5 year range usually sees through most mid-to-long range cycles.

Some companies get hit by the shorter wolves and it takes a while for their rotting, picked over carcasses to stop stinking. It typically takes a business whose stock was savaged about 3-4 years to fully recover from an attack of the shorts. Economically, the conditions that placed the company in the jackpot have to abate, then the lemmings have to turn and smell opportunity. Since many use the yardstick of what the guy jumping off the cliff next to them is doing, it can take some time for the whole herd to "find" your company's shares.

When do you stop holding?  Some good signs to think about not holding your buy:

• When analysts can't see much forward growth over the next 3-5 years and your stock is at or near peak price for the last 3-4 years;
• Change in management that muddies the water for continuity;
• Too many momentum investors buying in and over-inflating the value of the stock well above its fair market value.
• Major changes in an industry at its peak.  If oil has been artificially high for example, that bubble is likely to either deflate rapidly or just bust, taking a lot of the companies whose busineses, like drilling, are exceptionally price dependent, on a ride down with the commodity. It is important, though, to know the companies well enough to know which ones are price sensitive, and which ones are not. Pipeline carriage companies, for example, are federally regulated and only the interruption of flow from a natural disaster or supply constraints would impact their price;
• MUCK - Material Unforseen Circumstances that Kill - Poor financial controls, in-fighitng, accounting scandals, or the sale of junk that passed for financial instruments.  The first two are hard to know unless you are intimately familiar with a company until they happen.  If you have profits and hear a rattle, it may be a good time to take them and wait on the sidelines until whatever disaster sorts itself out.
  

The other BANK stocks

There are some stocks, which, if acquired at the right price,  produce dividends in excess of what you can find in comparable bonds or bank issues.  These can be long-term holds because you have the cash-flow of a bond with the liquidity of a stock. Royalty trusts, in oil, natural gas, etc. or limited partnerships traded as stocks generate medium to high returns, and often because of their high dividend appeal, maintain nice gains if you can get them on the dip.  Past winners (not necessarily where you should look now) include BP Prudhoe Bay Trust, Kinder Morgan Partners (KMP), and Frontline (FRO) to name a few.

So, to counter Cramer's brilliant nugget: Buy low in the depths of the company's crisis in a company that is big enough to weather tough times.  Hold as long as you can see enough forward growth that the day-to-day and short year-to-year burps don't look to impact the long-term value of the stock.  If you see major changes in the way that the company is doing business, changes to management that are not conducive to the company making money in future, or any signs of bookeeping or management irregularities, then quit holding.

There is never a blanket formula to the process. Learning the exceptions to the rules will keep assets that have real long-term benefits, and help you dump the flavor of the year, or decade, that is about to flame out.