I got my hands on a Kiplinger Magazine from 1990 the other day, and one article was a list of the “Top 10 Picks For The Next Decade” by an investment club that had monthly meetings in Texas. The ten picks were: Gillette (now Procter & Gamble), Philip Morris (now Altria, Philip Morris International, Kraft, and Mondelez), Coca-Cola, Wal-Mart, Disney, Pepsi, Amoco (which is now BP), Johnson & Johnson, Disney, and their wild international pick was Nestle.
All of those companies still exist today, and are much more profitable now than they were then. Some people heavily discount information like this because there was probably some investment club in Florida that predicted Enron and Woolworth as its long-term holdings.
The question is: Can you predict companies that will still be making sizable profits ten years from now? Of course you can.
All you have to do is look around you.
Look up all the companies that Coca-Cola, PepsiCo, Kraft, Nestle, General Mills, and Kellogg have under their corporate umbrella. Because pictures bring home the point easier than words, I included a visual image of some of the real-life brands that comprise PepsiCo pictured below.
Seriously, how the hell would you bankrupt a company like that? It would take astronomical debt, extreme mismanagement, an epically unimaginable lawsuit, and maybe a zombie invasion thrown in for good measure to take a company like Pepsi. Just look at those products that Pepsi owns. Do you really need a PhD from MIT to figure out that Pepsi is still going to be chugging out profits in 2023?
Now, I know what some people are thinking: If it is so obvious, why aren’t we all chilling at Foley Beach with a beer in our hand and a babe in our lap if long-term investing is so easy:
There are three reasons why:
(1) People rent stocks instead of own businesses. Some people actually sold Johnson & Johnson in 2008, 2009, 2010 because the “stock was going nowhere” while trading in that $60 range. What they did not realize is that Johnson & Johnson was like a coiled spring—the earnings per share, cash flow per share, and dividends per share were growing, and it was a great time to reinvest the dividends in the $60 range so you would get a nice little boost when the price did work its way up to the $80 mark.
If you thought like an investor, the stock price stagnation would have been completely irrelevant, or better yet, a cause for celebration. Most people just can’t handle stock price declines. My guess is that they neglect to focus on the fact that they are owners of a real business making billions of dollars across the globe.
(2) They set the standards too high when demanding a discount. With the exception of a global crisis like we saw in 2008-2009, you are not going to see Coca-Cola trade at 15x earnings. The earnings quality, mixed with the expected long-term growth rates, is just too high to bring the price down all that much. Sure, paying 30x earnings for shares of Coca-Cola will get you into trouble. But some people won’t buy Coca-Cola stock because it is selling for $39 (or whatever) and they think it is worth $36.50. That is being penny wise and pound foolish.
(3) They think you need to invest in million-dollar increments to be successful. That is true. We have three variables working together that determine total returns: we have the starting amount of our investment, the growth rate we can earn, and the time we are willing to set aside our capital. We can control two of those elements: the amount of money we invest, and how long we let it invest, but the growth rate is up to company management.
But here’s the thing: you can get rich with relatively modest sums if you latch on to a high-quality compounding machine and let it do its thing over time. If, on January 1st, 1990, you decided to invest $500 into Coca-Cola stock each and every month and you did it all the way through this day, you would have $622,344 worth of Coca-Cola stock, or 15,558 total shares. You’d be receiving over $17,400 per year in Coca-Cola dividends alone, and that amount is still growing! If you go to McDonalds and see someone order a dollar drink, you’d feel a little thrill go up your leg that no one else knows about because you, and only you, would know that you are making $47 in Coca-Cola dividends that day just for staying alive and waking up in the morning. Einstein wasn’t joking when he called compounding the eight wonder of the universe. Excellent companies let you take advantage of this fact over the long term.
Long-term investing is easy. You know people will be eating Nestle’s Toll House cookies ten years from now. You know they will be using Procter & Gamble’s Tide Detergent, and using Clorox bleach to meet their cleaning needs. It’s all so obvious. You don’t need to make investing harder than it is. Identify the excellent companies (you should be able to come up with at least thirty to fifty without breaking a sweat), and then decide which one is trading at the most attractive price. We don’t have to make this stuff difficult.
Originally posted 2013-06-26 19:33:20.