For the stocks mentioned on April 9, 2009 (as part of the Six Stock Portfolio but also later added to Stocks to Watch), the total return is 122 percent compared to 72 percent total return for the SPDR S&P 500 (SPY) over the same time frame.
For the new stocks mentioned on July 21, 2009, the total return is 77 percent compared to 54 percent total return for the SPDR S&P 500 (SPY) over the same time frame.
For the new stocks mentioned on December 17, 2009, the total return is 58 percent compared to 33 percent total return for the SPDR S&P 500 (SPY) over the same time frame.
(Naturally, dividends are included in that total return calculation for these stocks and for the S&P 500 so it is an apples-to-apples comparison.)
Combined, these stocks are up roughly 88 percent since each was first mentioned in those three separate posts a few years back.
Even though the group has done substantially better than the S&P 500, the performance so far doesn't mean a whole lot just yet.
First, I think a few years or so is still too short a time frame to gauge relative performance.
Second, returns need be looked at in the context of risks taken.
Having said that, I've liked these not only because I expect them to do well over the very long haul, but also because I think that -- if bought at the lower prices that many of these were available not too long ago -- the returns could be accomplished at lower risk.
The substantial moves higher in many of these stocks only makes it harder to accumulate more shares (or for the companies to implement buybacks) below intrinsic value. So there's little reason to be thrilled about the higher prices.
To me, the shares listed were attractive buys as long-term investments only when they could be bought lower than the maximum price I have indicated in earlier Stocks to Watch posts.
Since they were first mentioned, there were plenty of chances to do just that.
Not now.
Unfortunately, now most have become too expensive to buy or, at least, are borderline at best.
Naturally, my objective was to always buy these significantly below the maximum prices I've previously indicated when the opportunity presented itself. The prices that were made available by stressed markets in recent years allowed that to be largely accomplished.
The stocks on this list are fine businesses (some better than others, of course) and, in my view, if bought well and held for a long enough period were likely to create solid returns for shareholders.
For the most part the window to buy has closed on the vast majority of these stocks.
Those that were bought well when the discounts to value existed will be held by me long-term as the businesses compound in value.
As always, my intent is to hold long-term unless 1) the economic moat is damaged, 2) prospects were misjudged, 3) valuation gets extreme, and 4) occasionally when a substantial mispricing of another asset presents itself and the capital is needed for it.
For the most part the window to buy has closed on the vast majority of these stocks.
Those that were bought well when the discounts to value existed will be held by me long-term as the businesses compound in value.
As always, my intent is to hold long-term unless 1) the economic moat is damaged, 2) prospects were misjudged, 3) valuation gets extreme, and 4) occasionally when a substantial mispricing of another asset presents itself and the capital is needed for it.
Some things to consider:
- These stocks are intended to remain very stable over time with few additions or deletions. I think of it differently than the Six Stock Portfolio. Unlike that portfolio, I use Stocks to Watch as a list of quality businesses to monitor and, over a longer period of time, buy 5 to 10 of the stocks based upon what becomes available at the biggest discount to intrinsic value in the market. After that, the intent is to hold these indefinitely as long-term investments.
- In contrast, I established the Six Stock Portfolio in April 2009 as an example of some quality stocks that could be bought relatively quickly (at prevailing market prices back then) and held long-term. No trading required unless one of the conditions noted above warrants a sale. Otherwise, this concentrated portfolio exists to reject the idea that trading rapidly in and out of different securities is necessary to create above average returns. Basically, owning shares of quality businesses -- those with durable economics that increase intrinsically in value at an attractive rate over time -- bought initially at the right price trumps excessive trading.
- A term used frequently by analysts is a "price target". I never have one. To me, investor returns should be driven by the core economics of the businesses they own compounding in value, ideally over a very long time, not some unique talent to jump in and out of the stock at the right moment. The ownership period of shares in a sound business can be indefinite when bought at a fair price. Again, my sell behavior is influenced by the conditions noted above.
(i.e. Permanent damage to the economic moat, extreme mispricings, etc.)
The bottom line is that these are all intended to be long-term investments. A ten year horizon or longer. No trades here.
- In contrast, I established the Six Stock Portfolio in April 2009 as an example of some quality stocks that could be bought relatively quickly (at prevailing market prices back then) and held long-term. No trading required unless one of the conditions noted above warrants a sale. Otherwise, this concentrated portfolio exists to reject the idea that trading rapidly in and out of different securities is necessary to create above average returns. Basically, owning shares of quality businesses -- those with durable economics that increase intrinsically in value at an attractive rate over time -- bought initially at the right price trumps excessive trading.
- A term used frequently by analysts is a "price target". I never have one. To me, investor returns should be driven by the core economics of the businesses they own compounding in value, ideally over a very long time, not some unique talent to jump in and out of the stock at the right moment. The ownership period of shares in a sound business can be indefinite when bought at a fair price. Again, my sell behavior is influenced by the conditions noted above.
(i.e. Permanent damage to the economic moat, extreme mispricings, etc.)
The bottom line is that these are all intended to be long-term investments. A ten year horizon or longer. No trades here.
All of the stocks on this current list were part of the original Stocks to Watch unless otherwise noted.
Stock|Price @ 1st Mention|Recent Price|Total Return**
JNJ | 59.49 | 65.10 |20%
WFC | 19.61 | 33.42 | 76% - 1st mentioned 4/09/09
USB | 18.27 | 32.17 | 83%
MHK| 38.62 | 67.02 | 74%
KFT | 27.58 | 39.87 | 60% - Spin-off expected later this year
NSC | 52.06 | 72.93 | 48% - Added to list 12/17/09
MCD | 61.92 | 97.45 | 69% - Added to list 12/17/09
KO | 50.35 | 76.32 | 65%
COP | 43.50 | 71.63 | 83% - Price is prior to PSX spin-off
PM | 37.71 | 89.51 | 171% - 1st mention 04/09/09
PG | 55.49 | 63.64 | 26%
PEP | 52.10 | 66.00 | 39% - 1st mention 04/09/09
LOW | 20.32 | 31.47 | 65% - 1st mention 04/09/09
AXP | 18.83 | 60.21 |238% - 1st mention 04/09/09
ADP | 35.72 | 55.62 | 70%
DEO | 45.54 | 101.12 | 146% - 1st mentioned 04/09/09
BRKb| 59.50 | 80.45 | 35%
MO | 17.33 | 32.21 | 121%
MNST| 14.58 | 65.00 |346% - HANS changed to MNST and split 2-1
PKX | 93.63 | 83.25 | -5.0%
RMCF| 8.29 | 9.54 | 30%
It'd be safer and easier to invest right now if more of these stocks were selling at a discount to value. As I've mentioned many times in the past, not only does it allow the investor time to accumulate more shares below intrinsic value, the company itself can use excess free cash flow to do the same.
PKX has obviously been the worst performing stock but there are, of course, other laggards.
"When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases." - Warren Buffett in 1984 Berkshire Hathaway Shareholder Letter
PKX has obviously been the worst performing stock but there are, of course, other laggards.
It's tough to be enthusiastic about some of the businesses that have struggled to create intrinsic value as of late (JNJ, PEP, PG come to mind). The laggard stock performance doesn't bother me (that's, of course, beneficial in the long run), but the problems they've had in their businesses certainly does.
It's also tough to be thrilled about MNST (though the 346 percent return since it was mentioned is nice) as its stock price has moved into speculative price territory. The level of overvaluation makes it most likely the first voluntary sell candidate since I started this.
It's also tough to be thrilled about MNST (though the 346 percent return since it was mentioned is nice) as its stock price has moved into speculative price territory. The level of overvaluation makes it most likely the first voluntary sell candidate since I started this.
The maximum price I was willing to pay and noted in prior Stocks to Watch posts took into account an acceptable margin of safety***. That margin of safety differs for each company.
In other words, I believed these were intrinsically worth quite a bit more than the max price I was willing to pay. I also believe these companies generally have favorable long-term economics (i.e. high and durable return on capital) and, as a result, intrinsic values will grow over the long haul. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss.
Though I could surely be wrong, I consider these stocks appropriate for my own portfolio (not someone else's) given my understanding of the downside risks and potential rewards. It doesn't make sense for others unless they do their own research and reach similar conclusions.
In other words, I believed these were intrinsically worth quite a bit more than the max price I was willing to pay. I also believe these companies generally have favorable long-term economics (i.e. high and durable return on capital) and, as a result, intrinsic values will grow over the long haul. Of course, I may be wrong about the core economics and that margin of safety could provide insufficient protection against a loss.
Though I could surely be wrong, I consider these stocks appropriate for my own portfolio (not someone else's) given my understanding of the downside risks and potential rewards. It doesn't make sense for others unless they do their own research and reach similar conclusions.
So, even if some are not wildly overvalued, most of these stocks are too expensive to buy right now. The margin of safety too narrow for my money. There has been no shortage of chances to buy these at a discount to value in the not too distant past. That was the time to act. The risk of missing the chance to own a well understood investment when a fair price is available (error of omission) can be more costly than suffering a short-term paper loss (though, due to loss aversion, many focus much more on the latter).
Hopefully, at least some of these will get cheap again. Considering the outperformance, I'd be surprised if these stocks did all that well in the intermediate term. I'm hopeful they will not.
Hopefully, at least some of these will get cheap again. Considering the outperformance, I'd be surprised if these stocks did all that well in the intermediate term. I'm hopeful they will not.
Here are some thoughts on errors of omission by Warren Buffett from an article in The Motley Fool.
"During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in." - Warren Buffett
In other words, not buying what's attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment is initially bought at a fair price, and is likely to increase substantially in value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes accepting the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
In any case, the record has been plain to see since I first mentioned the above stocks on this blog. If turns out I've made dumb decisions it will be obvious over the long haul.
Above average long-term returns at lower risk is the objective. Performance over the complete market cycle without needing to trade much. For me, performance in a down market matters more. I'd expect the above stocks to do better in that environment. Having said that, I am not tempted to trade from "defensive" to "cyclical" stocks (or anything similar to that approach) depending on the market environment. These are not trading cards, they're part ownership of businesses. I'll let others play that game as I believe this approach will do just fine in the long run even if it offers a little less excitement.
Some may think it's time to add some new Stocks To Watch. Twenty or so is plenty and it allows one to really get to know what they own and would like to own some day. This approach to investment requires lots of patience and discipline. If anything, I'd like to reduce the number.
In any case, I'm certainly not expecting all that many will find this way of thinking about investment to be of much interest.
Finally, these are simply the stocks I like for my own portfolio. In other words, I certainly have no opinion whatsoever as to which stocks others should own.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above positions (at least those that eventually become, or have previously become, cheap enough to buy) unless they sell for significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The total return includes dividends and is based upon the closing prices on the date first mentioned compared to yesterday's closing price. 1st mention of each stock was 07/21/09 unless otherwise noted. Removed from the list a while back was BNI, a stock I liked up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal closed in early 2010. The price when 1st mentioned was $ 74.80 so it ended up as a ~34% return in a relatively short amount of time.
*** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and substantially misjudge a company's economics, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
In other words, not buying what's attractively valued to avoid short-term paper losses is far from a perfect solution with your best long-term investment ideas.
To me, if an investment is initially bought at a fair price, and is likely to increase substantially in value over 20 years, it makes no sense to be bothered by a temporary paper loss. Of course, make a misjudgment on the quality of a business and that paper loss becomes a real one (error of commission).
There is no perfect answer to this problem. When highly confident that a great business is available at a fair price it's important to accumulate enough while the window of opportunity exists. Sometimes accepting the risk of short-term losses is necessary to make sure a meaningful stake is acquired.
In any case, the record has been plain to see since I first mentioned the above stocks on this blog. If turns out I've made dumb decisions it will be obvious over the long haul.
Above average long-term returns at lower risk is the objective. Performance over the complete market cycle without needing to trade much. For me, performance in a down market matters more. I'd expect the above stocks to do better in that environment. Having said that, I am not tempted to trade from "defensive" to "cyclical" stocks (or anything similar to that approach) depending on the market environment. These are not trading cards, they're part ownership of businesses. I'll let others play that game as I believe this approach will do just fine in the long run even if it offers a little less excitement.
Some may think it's time to add some new Stocks To Watch. Twenty or so is plenty and it allows one to really get to know what they own and would like to own some day. This approach to investment requires lots of patience and discipline. If anything, I'd like to reduce the number.
In any case, I'm certainly not expecting all that many will find this way of thinking about investment to be of much interest.
Finally, these are simply the stocks I like for my own portfolio. In other words, I certainly have no opinion whatsoever as to which stocks others should own.
Adam
* This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here are never a recommendation to buy or sell anything and should never be considered specific individualized investment advice. In general, intend to remain long the above positions (at least those that eventually become, or have previously become, cheap enough to buy) unless they sell for significantly higher than intrinsic value, core business economics become materially impaired, prospects turn out to have been misjudged, or opportunity costs become high.
** The total return includes dividends and is based upon the closing prices on the date first mentioned compared to yesterday's closing price. 1st mention of each stock was 07/21/09 unless otherwise noted. Removed from the list a while back was BNI, a stock I liked up to $ 80/share. It was bought out by Berkshire Hathaway for $ 100/share in late 2009. Deal closed in early 2010. The price when 1st mentioned was $ 74.80 so it ended up as a ~34% return in a relatively short amount of time.
*** The required margin of safety is naturally larger for a bank than for something like KO. When I make a mistake and substantially misjudge a company's economics, the margin of safety may still not be sufficient. Judging the durability of the economics correctly matters most. If the economics remain intact but the stock goes down that is a very good thing in the long run.
Stocks To Watch
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Reviewed by jembe
Published :
Rating : 4.5
Published :
Rating : 4.5