It’s too early to start investing in stocks that you can hold through good and bad times. Consider these investments to be your core holdings. Consider these Forever Stocks to be your “Elite 10” or “Top 20” — or whatever number you choose.
These stocks should account for approximately 25% to 35% of your total portfolio.
These are the stocks you will hold through thick and thin, unless your reasoning for owning them changes significantly or you decide to replace one of them with a different stock.
Clearly, these Forever Stocks will suffer during the coronavirus-driven bear market that we have just entered. However, these losses are a small price to pay for significant long-term gains.
According to conventional wisdom, the best time to buy stocks is at market lows. However, because of our emotions, this is also the most difficult time.
So, what exactly is a Forever Stock?
We are referring to Forever Stock dominant, world-class businesses. While there is no universal definition of a world-class business, I believe they share at least four critical characteristics:
Forever Stocks have an impenetrable competitive advantage over their rivals — a “moat.” Their competitive advantage is manifested in rising revenue and cash flow. (Earnings should increase as well.) However, accounting gimmickry can easily distort profits, so We generally ignore reported earnings in favor of focusing on revenue and cash flow.
They use cash flow to benefit shareholders by increasing dividend payouts, share buybacks, astute acquisitions, and so on. or some combination of the three.
They keep their balance sheet healthy in order to maintain their financial flexibility and resilience.
That moat could be a superior distribution network, similar to what some railroad companies have. It could also be superior content, quality, or convenience — or a combination of these characteristics.
Such factors form a moat around the corporate “castle”…
Keep the castle safe.
- Amazon’s moat is its massive global distribution network, which enables it to sell goods at competitive prices and with superior convenience.
- Most traditional retailers are unable to compete. You’ve probably heard of Amazon stock’s meteoric rise.
- Nike’s moat is its reputation for high quality. Nike’s stock has delivered a whopping total return of 3,000 percent over the last 20 years — more than 16 times the gains of the S&P 500 over the same period.
Most world-class businesses, like Amazon and Nike, create products or services that integrate into our daily lives. When a consumer develops brand loyalty, they become less price-sensitive and resist switching. Both of these characteristics assist businesses in maintaining long-term sales growth and healthy profit margins.