Sunday, May 23, 2010

Is Long-Term Investing Dead?

When the market sees pullbacks like the one we've seen recently and the more drastic move back in early 2009, there's always a crowd insisting that long-term investing is dead. We are told that no stock is safe, and the drops we've seen prove it. In reality, the market is going to be volatile and constantly fluctuate. Long-term investing is in no way dead, and it all depends on what stocks you pick.

VMware (VMW) is a stock that has been on a tear lately as companies look to cut costs and improve efficiency in their IT environment. Is this a stock you can buy and forget about? Probably not. While VMware has great technology, high growth rates, and a leadership position in the virtualization market, technology is a rapidly changing business. VMware has two major competitors in Citrix and Microsoft and has risks to growth and margins. However, that doesn't mean VMware isn't worth buying. It's just not safe enough to throw a lot of money at and forget about. VMware is just an example of many great stocks that likely carry too much risk to buy and hold.

So what stocks are worth holding long-term? Warren Buffett has a great philosophy on investing and is probably one of the more well known long-term investors. He looks at companies that have strong moats and strong brands. These could be perceived as boring stocks, but with a little patience, you could end up doing better than you think.

Two notable stocks in the chart above are Nike (NKE) in the blue, and Procter & Gamble (PG) in dark green. Excluding dividends, Nike is up almost 250% and Procter and Gamble is up almost 100% over the past ten years. Dividends just make those gains even sweeter. This all happened while the S&P 500 (in red) did basically nothing over the past ten years. Nike is an well known brand which lets them sell shoes at higher profit margins. They are directly linked to growth in emerging markets. Procter & Gamble sells consumer products that people consistently need. Procter is also seeing growth in emerging markets. Other stocks shown on the chart above are Coca-Cola (KO), Johnson & Johnson (JNJ), Wells Fargo (WFC), and J.P. Morgan (JPM). All of these have performed better than the S&P 500 over the past ten years.

These stocks may be considered boring or simple, but they are an example that long-term investing isn't dead. A $10,000 investment in Nike (NKE) ten years ago would be worth around $25,000 now. A lot of people give advice to buy ETFs because you get access to a broad spectrum of stocks which instantly diversifies you.  But an investment in the S&P 500 ETF (SPY) lagged all six of these basic and boring stocks. Long-term investing isn't dead as long as you pick the right companies.

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