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.

Saturday, May 22, 2010

Are We Asking the Right Questions?

Meredith Whitney shows up on CNBC and it isn't a surprise when she spreads her doom and gloom. While she may end up being correct and her predictions become 100% true, I don't think anyone is asking her the right questions.

We know what she is going to say. She's been saying it for the past four years. The past 12-18 months have actually been good for banks while she continues to have sell and hold ratings across the board. She hasn't been right lately, and who knows, she may be right in the future. The question no one is asking is: "what will it take for you to become a bull on financials, Meredith?"

I think this is an extremely important question to ask someone who has been a long time bull or bear because you learn more about the person's thinking than anything else. CNBC won't ask this question, because with the Europe debt problems, Meredith is on TV to throw some more fear into the mix. If she begins to rattle off a huge list of things she needs to become bullish, then we're likely dealing with someone who will never change their mind.

In reality, banks are doing okay and have some positive trends going for them. Almost 0% interest rates and much stronger balance sheets just to name a few. However, there are still risks out there and things can change rapidly. Ultimately, I think you're going to get better advice from someone who considers both sides of the equation. And I don't believe that's what Meredith is offering.