Strategies for the Long Term Investor

Long Term Investors

Investing for the long term is extremely difficult for most people. There is an enormous tendency towards action on the part of most investors when most people should be sitting on their hands.

Many successful investors have followed an approach called the coffee can approach. This story emanates from the 1950’s and comes from an investment manager who had a client whose husband died suddenly. The wife had then transferred the husbands portfolio over for the investment manager to begin to manage. The manager was shocked! He found that the husband had basically stolen the managers ideas in the stock market but had never heeded the sell recommendations. The husband had put $5,000 into every recommendation the manager had suggested. This produced many losers with more than half of the $5,000 he put into numerous stocks being lost. But also the portfolio had many enormous winners with one in particular (an investment in Xerox corp) being worth more than 800k. The husband’s portfolio upon his death was worth substantially more than his wife’s. With the Xerox position being worth more than her entire portfolio.

This type of strategy lines up well with that of the investing style of Phil Fisher. His book Common Stock and Uncommon Profits is ranked in the top 5 of best investing books of all time. He was one of the most vocal supporters of long term investing and was an astoundingly successful investor in his own right.

Fisher’s Common Stock and Uncommon Profit set out as somewhat of a counterpoint to the work of Benjamin Graham (and his famous books Security Analysis and the Intelligent Investor). Fisher emphasized investing in a select few truly great companies with high profit margins, above average sales growth, excellent management with unquestionable integrity and a long term outlook. Whereas Graham would invest in predominantly extremely cheap securities with sometimes terminal businesses. Fisher eschewed selling stock ever unless he felt he had made a mistake of had better use of funds. Fisher would not sell stock even if the stock had gotten temporarily overvalued because of transactional costs/taxes and also because getting back in at significantly lower prices is often very difficult in most market environments. If a stock didn’t move after a certain period of time or it became fairly valued Ben Graham would sell it. Fisher stuck to very few meticulously research names that could be absolute bonanzas to the investor. He wrote that for every one stock he purchased he may have considered/investigated 250 companies and focused exclusively on common stock. Graham had an extremely diversified portfolio which included bonds and preferred stock. Graham would purchase control/activist situations, mergers/special situations as well as traditional value investments whereas Fisher was content to be a passive investor and eschewed shorter term strategies such as merger arbitrage. Graham purchased stock based on quantitative factors almost exclusively stating, for instance, that one shouldn’t double count management’s ability in a company. Fisher focused mostly on qualitative factors. Graham never met with management. Fisher would not only meet with management but would also call major customers, suppliers and lower level employees as apart of his so called, “scuttlebutt” research.

A Few Strategies and Observations From Successful Long Term Investors

  • Many long term investors will often state that they wish that they had totally ignored every macro-economic forecast that they had come across. The author of 100-1 in the stock market, Thomas Phelps, stated that fears of a recession that never came (or if it did it didn’t last long enough to buy back in at a lower price) as a recurring mistake that he made. His research indicated that if you bought one of several leading companies at its highest price right before the great recession you would have still made 100x your money in many names.
  • Although investing in popular companies such as Apple, Google and Facebook has been well rewarded in the past, the companies that will make the highest returns in the future are companies that are currently small that will become large. A question to ask yourself may be, “can this company’s earnings and revenue grow to be significantly larger than today?”
  • Although Phil Fisher invested mostly in technology companies it is not necessary to invest in these types of companies in order to make 100x your money. Mundane or neglected companies can also be great compounders of wealth.
  • Companies such as banks, insurance companies and utilities can all be extraordinary investments despite being in industries that aren’t exactly growth industries.
  • Many of these companies have defensible positions often called a moat. A company with a moat but without great re-investment opportunities must buy back shares or issue large dividends.
  • Some investments in companies that look expensive on normal metrics may be permissible if the growth rates are high or if growth persists for an exceptionally long period of time.
  • Investing in a select few thoroughly researched companies is much better than investing in a widely diversified portfolio. Especially if you are purchasing securities regardless of their fundamentals and exclusively for diversification purposes.

Long Term of Short Term?

Should an investor invest long term in growth stocks like Phil Fisher or in the shorter term in special situation-type investments. It is my suggestion that the intelligent investor should be open-minded and invest in strategies and in securities as current market dictates. This mostly stems from the fact that in investing there are really no hard and fast rules that will work consistently year after year. Psychologically it may help an investor to stay invested in his/her longer term investments if they have special situations to invest in. Diversification of investment duration may work well for most investors. If the market is priced at the higher end, as it is today, it is understandable to invest more and more in special situations. The opposite is also true: if the market is priced extremely low it is usually a good idea to start looking for investments in high quality enterprises that promise meaningful earnings growth. One should simply distill an investment into its anticipated after-tax annualized returns and compare that to its risks regardless of strategy.

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