Hi everyone, thank you for returning to my blog. I hope you found my last blog on “How to Invest Like Warren Buffett” interesting and useful.
In this blog, I’m going to show what traits to look out for when it comes to a good long-term stock, as these stocks can bring you higher, more consistent returns the longer you hold them.
Warren Buffett and other value investing proponents are quick to point out that you should be willing to hold on to price for an extended period of time to take advantage of value stock picks. Sometimes this can even take over 10 years.
It is important to separate the long-term investment companies from the short-term ones. To find a stock that can be held for 10 years or more, it is important to know the characteristics of those stocks. Fortunately, there are several qualities that these long-term games often share.
Long-haul stocks often have these characteristics:
Simple businesses that make products or services that have been proven over time tend to make good long-term investments. Some examples of such products are toothpaste, toilet paper, office supplies, banking, and insurance.
· Many of these businesses may be considered “boring”, but these products and services have been around for some time and will continue to be important.
· High-tech companies often do not meet this requirement unless they are very well established. Microsoft would be a very good example, but AOL, which is still around (yes, really), is hardly the company it was in the late 1990s.
Companies with minimal debt and good cash flow are likely to survive even if the economy falters. These companies tend to be steadfast and pay constant dividends. Dividend payments come from income in excess of what the company needs to be successful or expand.
· Is the company valued fairly? How tight is the competition within the same industry for pricing? This is the perfect place to use price / earnings (P / E) ratio in your analysis.
Are returns affected by the strength of the economy? If so, by how much? If past earnings have been going down, do you understand why? Has your income increased in the last 10 years? Can you reasonably expect them to keep rising?
· Value investors believe that price ultimately follows profits. It is only obvious that long-term earnings growth will translate into long-term price gains.
If you look at the companies popular today, you will find that most of them held positions well into the past. A company doesn’t suddenly have this quality. Many of these companies existed in the childhood of your parents or grandparents.
· How has the company performed in weak economies? If it does badly, is it still vulnerable to the same economic conditions?
Executives in this type of company don’t need to do anything spectacular. You just guide the ship gently and avoid anything stupid. The human factor is unpredictable, so sound management is important.
- The best companies may not require great management, but it’s still good to have.
Is it cheap labor, new technologies or the threat of debt repayment? Can the competition make life difficult for the company?
- Play the devil’s advocate and try to invent a scenario that would spell disaster. What is the probability that this scenario will occur?
· Understanding the downside is important in evaluating the downside. How much risk does it take to gain access to the potential rewards?