Successful Long Term Investing

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” Warren Buffett

You need courage, a long term focus, and the discipline to adhere to a long term plan to buy stocks when the markets are turbulent, stock prices are melting down, and the economy is in a deep slump, and the outlook for corporate earnings over the subsequent quarters is unfavorable. In Warren Buffett’s view, “Widespread fear is your friend as an investor because it serves up bargain purchases.” Thus, smart long-term investors love when the prices of their favorite stocks fall, as it produces some of the most favorable buying opportunities. According to Buffett, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” Warren Buffett

Warren Buffett

Additionally, investors must focus on the long term — a minimum of seven to ten years — and look for high-quality, blue-chip companies that have fortress like balance sheets and can generate extraordinary free cash flow. In the short term, equity markets tend to swing wildly from day to day on the smallest of news, trend and sentiment, and celebrate or vilify the most inane data points. It’s important not to get caught up in the madness but stick to your homework. Warren Buffett quipped that, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food, consumer goods, and medicines), since it’s essential to keep capital preservation and margin of safety at the top of your priority list when deciding how to invest your money. As Buffett says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Businesses that are well managed and that have strong balance sheets typically display certain characteristics:

They carry little or no debt.
They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don’t have to raise equity or sell debt.
They have a proven history of management excellence.
They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital.
They have a durable competitive advantage which could mean cost advantages, a strong brand name, or something else.
In addition, they are global in scope. After all, 95% of the world’s population lives outside the U.S., and economic growth is likely to be greater abroad than at home.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffett

To be a successful long term investor, it’s essential to filter out the short-term noise. Most of the chatter from Wall Street and in the financial entertainment media headlines is just that: chatter you can and should ignore. “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. According to Buffett, “Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren Buffet

If You’re Not Investing You’re Doing it Wrong

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Warren Buffett

Investing in equities delivers higher returns than bond or cash investments over the long term but is accompanied by a higher exposure to market risk. Investing in fixed income investments offers more modest return potential and risk exposure. Investors can invest in cash as a low- risk, low-return strategy, which is ideal for short-term savings goals or to balance out the risks of stock and bond investments. Ideally, investors’ asset allocations should reflect their goals, risk tolerance, time horizon, income and wealth, and other personal factors.

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

References:

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