The best time to buy stocks “forever” is…
The market has given us a boost recently, but what else is new?
My editor told me earlier today that she did 108% on some Starbucks Corp. (SBUX) calls at the start of the year… only to have a similar trade plunging 66% immediately afterwards.
It’s clear that what worked a few weeks ago isn’t working now, and the urge to stay away is strong.
However, as I’ve said many times, I think bear markets – and downtrends – are a good thing.
Not only have market lows paved the way for higher highs, but when things look grim, know that stocks you might not ordinarily have afforded (or wanted more) are now “ on sale”.
Which means now, more than ever, it’s time to build your “Forever Stocks” portfolio…
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Buying Forever shares in the worst times
I don’t think it’s too early to start looking at the stocks you hold in good times and bad. Think of these investments as your primary holdings. Treat these Forever Stocks as your “Elite 8” or “Top 10” – or any other number you decide.
In total, these stocks should make up about 25% to 35% of your total portfolio.
These are the stocks you hold through thick and thin, unless the rationale for owning them changes significantly or you decide to replace one of them with another.
Obviously, these Forever Stocks will suffer during a bear market, but these losses are a small price to pay for big long-term gains..
Conventional wisdom says that market lows are the best time to buy stocks. Yet, thanks to our emotions, it is also the most difficult time.
As investment legend Sir John Templeton once remarked…
Buying when others are selling with discouragement and selling when others are buying with greed takes the greatest fortitude…and reaps the greatest reward.
So what kind of security is a Forever Stock?
I’m talking about dominant world-class companies…
Although there is no precise definition of a world-class company, I believe that they share at least four essential traits:
- Forever Stocks has an impregnable competitive advantage over its competitors – a “gap”.
- Their competitive advantage manifests itself in increased revenue and cash flow. (Earnings should also increase. But accounting gizmos can easily manipulate earnings, so I generally ignore reported earnings and focus mostly on revenue and cash flow.)
- They use cash flow to enrich shareholders, through growing dividend payouts, stock buybacks, shrewd acquisitions…or a combination of the three.
- They maintain a healthy balance sheet to preserve their financial flexibility and resilience.
In the rest of today’s issue, we’ll talk about this competitive “fluke” that I highlight in issue 1.
This gap could be an upper distribution network, as some railway companies have. Or it could be superior content, quality or convenience – or a combination of these characteristics.
Such factors drive a wedge around the corporate “castle”…
Protect the castle
Amazon.com Inc. (AMZN)The fluke of is its huge global distribution network, which enables it to sell goods at competitive prices and with superior convenience.
Most traditional retailers can’t compete with this. You know the success story of Amazon stock. If you invested $10,000 in it 10 years ago, you would be sitting on $96,130 today, even with the recent sell off.
Nike Inc. (NKE)is its reputation for superior quality. Over the past 20 years, Nike shares have generated an impressive total return of 3,000%, or more than16 timesthe gains of the S&P 500 over the same period.
Like Amazon and Nike, most world-class companies develop products or services that fit into our daily lives.
When consumers become loyal to a brand, they resist change and become less price sensitive. Both of these trends help companies maintain long-term sales growth and healthy profit margins.
It’s good for the shareholders.
In the early 1980s, I was the manager of the Hard Rock Cafe in West Hollywood. This place was moving all day, every day. From the time we opened the doors for lunch until we closed the bar after midnight, this restaurant was packed with customers.
For several days, this Hard Rock raked in more dollars selling t-shirts, bomber jackets, and other merchandise than selling burgers and milkshakes.
That’s the power of a strong brand – and a strong moat.
And that’s why it’s so important to own Forever Stocks.
At the date of publication, Eric Fry held (neither directly nor indirectly) any position in the securities mentioned in this article.
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