How do we know if a long-term investment is the right one or not?
When investing, you should never think about whether the stock in question will grow or not in a year. The question is simply not relevant to the goal that each of us sets out, which is to build wealth. When you buy a stock, no one will ever know its performance within a certain period of time.
Rather, what should interest the investor most is to acquire stakes in solid and productive companies that can reward in the future the economic effort made to buy them today.
And this brings us back to the difference between trader and investor: the former thinks of making the most of the short-term, the latter opts for a more forward-looking view by focusing on constant returns in the long term.
Features Best Long Term Investments
For new investors who are new to technical analysis, I thought it would be helpful to give you a brief overview of some of the most important characteristics long-term investors should look for in stocks today. While these tips aren’t a guarantee of success, they could theoretically make it easier for you to identify the most profitable stocks over the long term.
1. You Can Easily Describe (in a Few Sentences) How the Company Earns
You may be amazed at how many inexperienced investors risk their money on a daily basis to buy stocks in companies they can’t understand the business of! But the understanding of a company should be such that it can explain to an elementary school student, in no more than a few sentences, exactly how it manages to generate its profits.
You should therefore be able to talk about its main income and expenses. For example, if you are looking into a tire manufacturer, you need to take into account the cost of rubber and other materials essential to their business. If you are looking into a freight company instead, the cost of fuel will be one of the key factors to consider.
2. The Company Can Generate High Returns On Capital With Very Little Leverage
A firm’s ultimate ability to generate long-term returns for its owners will be determined by the return on capital it produces. The best firms on the market produce high returns on equity without the need to borrow a lot of money.
Within this fundamental truth lies the secret of why some industries tend to produce a disproportionate share of the most successful investments over periods of about 25 years. Alcohol, tobacco, laundry detergents, kitchen soap, chocolate… are all products made by companies that usually manage to generate steady profits without having to make large capital expenditures.
3. The Company’s Products / Services Have a Kind of Enduring Competitive Advantage
This factor is what the great Warren Buffet calls ” moat ” (moat). To explain the competitive advantage of a company or a business, Buffett uses the moat of a castle as an example to demonstrate how dominant and profitable a company’s position in a market can be. And this can depend on many factors: product, brand, licenses, patents, legislation. The classic example is Coca Cola: is there another carbonated soft drink producer in the world at its level? No!
The competitive advantage of Coca-Cola is evident, because since the distant 1892 it has been the market leader with its soft drink. Over the years, the company has seen wars, famines, economic booms and recessions pass… but Coca-Cola is even more alive than ever, with a world-class brand that continues to grind stratospheric profits.
This leverages customer loyalty to the product, which can allow the supplier to set even higher prices without losing anything in terms of returns.
This leads to a feedback effect where profits grow, improving economies of scale and thus generating even more surplus cash flows. And this excess cash flow allows you to pay for more marketing and product innovation which, in turn, will increase customer loyalty to the brand.
4. The Company Puts Shareholders’ Interests First
Another factor to consider is whether the company has a history of returning excess liquidity in the form of preferred stock repurchase plans and / or a dividend that grows faster than the current inflation rate. The concept is to only buy stocks from companies that have the interests of shareholders first and foremost.
It is not uncommon, in fact, that the policy of some management concerns more than anything else (excessively) generous salaries, obtaining financing (more or less legitimate!) Or dubious contracts on interconnected entities controlled by members of the owner family. The more a company earns, the more it should reward its shareholders. This is the philosophy that should guide your investments.
5. The Company’s Market Capitalization and Company Value (relative to net income) are Reasonable
Even the best companies in the world can be a bad investment if you pay too high a price for them. In particular, the price is probably the most important variable to consider for a long-term investment, as even a bad company bought at a fairly cheap price could cause the accumulation of wealth (under the right conditions).