Question for the board.
If it was announced today that world stock markets will close tomorrow for twenty one years and you can make four purchases today, what would you buy?
My first son was born in November past and I wanted to buy him four companies that I promised myself I would never sell and I would not give him the option to sell them until his twenty first birthday. Forcing myself to answer my question for real back in November, I bought the following four companies for my son (well part of them): Berkshire, Coke, Moody�s and Wrigley. I paid what I consider full value for all except Berkshire which will be a drag on the portfolios performance. However, I believe my commitment never to sell will be advantageous over such a long period.
Well what are your four?
I'd almost mention Gannett, if no one has. The problem is, similar to JNJ, they need to keep making acquisitions, but there are so few near perfect companies. GCI could also do a little more to return cash to shareholders.
20 years is a long time, but one might also consider Starbucks and Costco. But to hang on to something for 20 years, there needs to be some basis for determining whether the company will know when optimal ROIs have been achieved and when cash should be reinvested or not. Since both of these companies are still in the 'growth' stage, we don't know how they will act when the proverbial brick wall is hit. We do know, for example, companies such as MRK, KO, and WWY do return cash and have a history of doing so, but Costco and Starbucks don't have a long enough history to get a sense of that.
Just thinking aloud, but Sherwin Williams is one that does return cash, in volumes from time to time, even if the business they're in is not much for growth. They've also made some silly acquisitions once or twice, but now have 'religion' and use cash flow to buy in shares, a strategy which, of course, could change any time. But my fondest hope is I end up with the last share worth billions;-). A sort of stealth investment.
Thanks for your picks folks. I thought Johnson & Johnson was an excellent idea for the long term. Especially at current prices. I will be taking a closer look for my own portfolio.
Someone mentioned that a buy and hold strategy limits performance to 15% p.a. Well, if I could get a return of 15% over a long period wild horses couldn�t stop me from signing up. For what its worth I expect a return closer to 10% p.a. from my four picks over the next 21 years at current prices.
Buffett has said that if he could get a risk-free 14% he'd take it all day
i took a look at JNJ a couple years ago, and its long-term return (since 1950) was something like 18-19% with dividends reinvested, though it may have regressed slightly to the mean now
the company has trashed the indices over any mid- or long-term horizon
i hold a token few shares, but it's just too simple and lucrative an idea to have any serious appeal to me!
I established a 'can't sell' core to my portfolio a few years ago. All that I've done with them since is let dividends reinvest and added a bit to them when the price has been right. I feel good having such a foundation; it lets me take bigger risks with the rest of my portfolio without feeling like I have no 'plan B'.
Four that I'd pick from that group to put in a son's account like yours:
Coke and Wrigley we agree on, J&J is a good proxy for 'health care', which should grow nicely over the next two decades as the boomers age. HDI is probably my riskiest core holding, but is also the one that I think could give the greatest return.
Incidentally, my other two core holdings are G and PEP.
I'm hoping to at least match the broader market with lower risk. Since they're all in taxable accounts they should gain the benefits of the tax-free loan from Uncle Sam WEB and CM talk about.
I found that picking stocks I wouldn't be allowed to sell made me think very differently than I do with stocks I'm planning on holding just a few years. It's not easy to find companies that are almost sure to be around and doing well 2 or 3 decades from now. Hopefully I picked a couple :)
(disclosure: I probably didn't)
I'll give it a go
Nobody has mentioned PGR - lots of cash - easy to understand. Can probably grow until they have 40% of the Auto market - that takes care of 10 years - not sure what they do after that.
I beleive PGR and GEICO will be 1 & 2 in Auto insurance long before 20 years.
JNJ - reasonably priced - healthcare will continue to dominate. I think these guys do things better - R&D, acquisition, sales. Broader portfolio than many pure pharmas.
CD - I know - a little different. Great Cash business, low capital requirements. Still tarred from the debacle of fraud and poor due diligence. Seem to be getter smarter about transparent financial management also. Travel and Real Estate will be around a while.
BRK - why not.
These comprise about 85% of my core portfolio -the remainder is long-term bond funds. Down from 30% long-term bond last spring - when WEB sells I do.
I have a great niece/nephew due in weeks. We will be buying PGR for him/her at birth. (If BRKc becomes available we may get a couple of thse instead).
KO, DIS & GE are other candidates that come o mind.
I wrote this in may 2001 concerning the dow. It applies to buying any stock at top value:
Your premise is good for searching for good stocks. But why do you have to buy them now? Let's say I pick WMT, TGT, HD, WGY, FRE, FNM, FTN, UPC, USB, CTX, JCI, UHT, TFX, GE, JNJ, MRK, UTX, FDX, HDI as a group of high quality companies I'd pick from. These all meet my criteria as I've discussed before. My actual list includes 150 companies I can wait for.
A simple method would be to buy the first 5 that trade at a PE of 15 or less. My guess is many of them will in the next 5 years. The PE inflation will then give you a nice jumpstart and a nice margin of safety.
Personally, I do sell after a company has increased to 50% above the price I'd currently pay for it, but that wasn't the question.
But write down these tickers. My guess 2/3 of them will drop to a PE of 15 and rise to a PE of 22 in the next 5 years. That represents a 50% gain plus an average for the group of about 10% a year in earnings growth. (Reality usually doesn't work this neatly.)
I wouldn't seriously commit not to sell for 21 years. Things change and better opportunities will arise over time. I almost never buy and hold and my trading portfolio is up 10-fold since 1998. Had I bought and held it probably would be only a double or triple over the same period. In fact, I went to 90+% cash today, cashing in all but two names in my trading account. I will wait for the correction/crash that is due, or at least for the names I want to get cheaper.
BRKa/b, MO, ALEX, and JOE.
And for all these arguments about what is "investing", I think Ben Graham came up with a fairly good definition.
"An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."
It doesn't matter if you "buy and hold", run arbitrage, do liquidations, etc... as long as you engage in thorough analysis of securities that promise safety of principal and a satisfactory return, you're "investing".
I don't believe any company is immune to insider fraud and theft. BRK is certainly well diversified, but so is IBM or any other multinationals who are not concentrated geographically.
No doubt, buy-and-hold is the only way for people who have no interest in investing or running a business. Keep in mind that in that case performance is doomed to stay below 15%.
The "magic of compounding" argument was invented for suckers who believe that a 15% annual return is as good as a 200% annual return.
"The "magic of compounding" argument was invented for suckers who believe that a 15% annual return is as good as a 200% annual return."
With your level of expertise in trading and making 200% annual returns- all you need to do is go find a million dollars, and in 15 years you should amass a net worth equal to what Buffett's is today.
I guess you know if you are successful averaging 200% a year compounded return on your investments you will become the wealthy man in the world in rather short order. In fact, you may need to have all major monetary authorities run 24/7 printing more money to keep up with you!
Have you computed what 200% compounded annual on let's say just $10,000 would become in 20 years, 30 years, and 40 years (when you are 71)?
Get back to us with the answers as soon as your brain cell lacking brain can compute and, more importantly, comprehend them.
>>>Berkshire, Coke, Moody�s and Wrigley.
Coke and Wrigley may run aground in the future because they sell a lot of stuff containing refined sugar: increasingly health concsious Americans will probably be moving away from that.
"increasingly health concsious Americans will probably be moving away from that"
Diet Coke has been a huge hit. We drink a lot if it at my house. We drove to Puerto Vallarta over the holidays, and "Coke Light" is in every single Mom and Pop in Mexico. A lot of people who don't diet even prefer the taste over the too sticky sweet regular Coke.