How To Spot A Long-Term Winner In 4 Easy Steps
Sometimes, we make investing more complicated than it really needs to be. At the end of the day, the goal is still to buy low and sell high.
For short-term traders, that might mean entering a stock in the morning and exiting a few cents higher in the afternoon. That’s fine for some. But speculating on short-term price swings is more akin to gambling than investing.
Instead of “renting” a ticker symbol for a few days or weeks, become a part owner in these special businesses and don’t let them go. That’s been Warren Buffett’s strategy, which has produced an incredible cumulative return of greater than 2 million percent for his Berkshire Hathaway shareholders since 1965.
How long does Buffett hold his stocks? Two years? Five years?
Actually, he likes to say that his preferred holding period is “forever.”
When you think about it, this makes perfect sense. Truly elite businesses are rare. So, as long as they continue to perform, why would you cash out?
Unless the company falters or the industry economics change, I’m usually in it for the long haul. That allows time for the company’s competitive advantages to shine through. Plus, it removes the headaches of day-to-day micromanaging, as well as the frictional costs (like taxes) of excessive trading that can erode returns.
Buy-and-hold investors typically expect to hang on to their holdings for at least a year or two. But when a truly special company comes along, they might not intend to sell. Period.
Granted, that type of lifelong commitment takes a unique company with an unusual combination of durable assets and intangible strengths. Such businesses can give you the peace of mind to blissfully endure market corrections and economic down cycles. And they can make an outsized impact on your portfolio.
A Classic Example Of A Long-Term Winner
One such famous example is Coca-Cola (NYSE: KO). Buffett first began investing in Coca-Cola (NYSE: KO) in 1988, spending $1.2 billion to accumulate 100 million shares. He could have cashed out a handsome profit anytime since then but chose not to. And why leave, considering the company sells nearly 2 billion servings of its popular beverages every day worldwide — about 20,000 per second?
Stock splits subsequently grew Buffett’s position size to 400 million shares, while steady dividends and share price appreciation ballooned the value of this $1 billion investment to $5 billion, and then $10 billion. Today, this stake is worth about $24.8 billion.
You can sift through Coca-Cola’s SEC quarterly filings if you like. But you don’t really need to. This is truly a low-maintenance “forever stock.” The iconic Coca-Cola name is instantly recognizable in 200 countries around the globe. The company owns 20 brands (including Dasani, Minute Maid, and Powerade) that each generate over $1 billion in annual sales.
Try as they might, competitors haven’t been able to chip away at the firm’s market share or come close to replicating its vast distribution network. It has outperformed the S&P by a wide margin over the past three decades — and will likely do the same over the next couple.
Now, we own a few stocks like this over at High-Yield Investing. But stocks like these rare gems don’t exactly grow on trees. So how do you spot a potential long-term winner? Well, you can start by finding qualified candidates that answer yes to each of the following four questions…
4 Things To Look For In A Long-Term Winner…
1) Do the firm’s products and/or services stand the test of time?
We live in a time of rapid technological development. Breakthroughs can quickly turn the highfliers of today into the forgotten has-beens of tomorrow.
Any advances that make products smaller, faster or stronger can quickly render computer hardware (for example) obsolete. By contrast, life insurance, lumber, (and yes, beverages) have been in demand for over a century and aren’t disappearing anytime soon.
2) Is management competent and trustworthy?
Buffett pays close attention to management, and so should you.
If you’re holding a stock for only a month, it doesn’t really matter who is sitting around the boardroom table. But managerial decisions and execution can make (or break) a company over time.
The longer the holding period, the more important it is to trust those who are calling the shots. All it takes is one overpriced acquisition to drain resources and destroy shareholder capital. Large companies have billions of accrued profits in the bank and more coming in all the time. Effective deployment of that capital can mean the difference between triple-digit share price gains — and a stock that remains adrift.
I’m always on the lookout for proven management that can balance dividends and buybacks with necessary capital expenditures and growth initiatives.
3) Can the company weather a storm?
The economy inevitably goes through periodic slumps, if not outright recessions. So if you’re going on an extended journey with a stock, the company better be able to withstand a few detours and bumps in the road.
I don’t necessarily require a stock to deliver positive returns in the teeth of a bear market. But it is reassuring to know that the company itself can remain solidly profitable — and thus continue paying dividends — even when the climate turns cold.
4) Does the company have a wide economic moat?
I don’t care how great it looks on paper today. Without the protection of a moat, any business is vulnerable to attacks from competitors that can pillage profit.
In fact, the more attractive the business, the more likely it is to encourage aggressive competition.
Moats are dug by competitive advantages that keep competitors at bay. They also allow a company to generate lofty returns on capital that consistently exceed the cost of capital (the goal of any business). They can take many forms, from patent protection to switching costs.
Keep in mind that moats can gradually get eroded over time. So to qualify as a “forever” company, the competitive advantages must not only be strong, but also sustainable for at least the next 10 to 20 years.
The Bottom Line
Entrenched leaders with timeless products and unassailable moats naturally generate superior returns. And if management has a proven track record of growing dividend distributions in good times and bad, then you know you’ve got a solid candidate.
If you want to systematically build wealth over time, seek out exceptional companies with sustainable competitive advantages that deliver superior returns on capital. These well-positioned leaders routinely generate surplus free cash flow — and share it generously with stockholders.
And if you’re looking for a stable of long-term holdings that also pay out generous dividends, then I invite you to check out my latest report…
I’ve identified 5 safe, high-yield stocks that allow you to keep it simple. You can forget about meme stocks, volatile cryptocurrencies, and complicated trading strategies… With picks like this in your portfolio, you may never have to worry about what the market is doing again!