Hi everyone, thank you for coming back to my blog. I hope you found my last blog interesting and useful, where I covered ‘How To Invest Like Warren Buffett’.
In this blog, I’m going to show what characteristics you should be looking out for when it comes to a good long term stock, as these stocks can give you a larger and more consistent return the longer you hold on to them for.
Warren Buffett and other value investing proponents are quick to point out that you should be willing to stay the course for an extended period of time in order to get the benefit of value stock picks. Sometimes, this can even take over 10 years.
It’s important to be able to separate the long-term investment companies from the short-term ones. To find a stock that you might be kept for 10 or more years, it’s important to know the characteristics that these stocks possess. Fortunately, there are several qualities frequently shared by these long-term plays.
Stocks for the long haul frequently share these characteristics:
1. A business that will still be thriving 10, 20, or even 30 years from today
Simple businesses that produce products or services that have stood the test of time are usually good long term investments. A few examples of such products would include toothpaste, toilet paper, office supplies, banks, and insurance companies.
· Many of these businesses may be seen as “boring,” but these products and services have been around for a while and will continue to be important.
· High-tech firms frequently don’t meet this requirement, unless they are extremely well-established. Microsoft would be a very good example, but AOL, which is still around (yes, really), is hardly the company it was back in the late 90’s.
2. Solid financials
Companies with minimal debt and good cash flow are likely to survive even when the economy is faltering. These companies are typically unshakable and pay consistent dividends. Dividend payments come from earnings above and beyond what the company needs to thrive or expand.
· Is the company valued fairly? How close is the competition within the same industry regarding pricing? This is the perfect place to use the Price to Earnings ratio (P/E ratio) in your analysis.
3. Consistent earnings
Are the earnings affected by the strength of the economy? If so, by how much? When the earnings have slipped in the past, do you understand why? Have the earnings been rising over the last 10 years? Can you reasonably expect them to continue rising?
· Value investors believe that price ultimately follows earnings. It only stands to reason that long-term earnings growth will lead to long-term stock price gains.
4. Good history
If you look at the popular companies today, you’ll see that most of them held a certain position far into the past. A company doesn’t suddenly have this characteristic. Many of these companies were around during your parents’ or grandparents’ childhoods.
· How has the company performed in poor economies? If it performed poorly, is it still susceptible to the same economic conditions?
5. Good and consistent management
Executives at this type of company don’t have to do anything spectacular. They simply guide the ship gently and avoid doing anything foolish. The human factor is unpredictable, so solid management is important.
The best businesses may not require great management, but it’s good to have it anyway.
6. Understand what could potentially destabilise the company
Is it cheap labour, new technology or a looming debt payment? Is the competition in the position to make life difficult for the company?
Play devil’s advocate and attempt to invent a scenario that would spell disaster. What is the likelihood of that scenario happening?
· Understanding the downside is important to evaluating the upside. How much risk is required to have access to the potential profits?
A good long term stock is like a good long term relationship, certain partners are great for the short term, but are a disaster in the long term. Successful value investing requires finding companies that can be held for 10 or more years. The companies that have these characteristics frequently make the best investments.
Until next time, stay safe, and please share this blog with anyone who might find it useful. Thank you!
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