My investments fall into two buckets. In one bucket, I have a timeframe of weeks/months and I will sell a stock quickly if it moves against me. In the other bucket, I invest for the long-term. I call it my "Concentrated Portfolio Of Great Companies." I am more patient with those companies and want to hold them for years and, hopefully, decades. In this article I will explain my approach for long-term investing and present some of the companies that make the cut.
I am looking for leading companies with simple business models and a good chance of growing much larger while generating cash flow. I also prefer companies that are growing their dividends.
It is just as important to know what to avoid. For this part of my portfolio, I mostly avoid technology, healthcare, fashion and commodity companies. I don't need excessive diversification, just a few great companies.
Great Companies Are Like Homes
Generally, 80% of the conversations about real estate fall into two categories.
Prospective home buyers always talk about how nervous they are about paying too much.
People who bought a home many years ago talk about how the value of their home doubled or tripled and they are glad that they didn't listen to the worrywart who said they were paying too much.
(The other 20% are conversations with people who, unfortunately, got burned in the real estate crisis.)
The best time to buy real estate is always twenty years ago. Same with great companies.
When looking at great companies from the perspective of the present they will often seem overvalued and, sometimes, risky. However, they thrive over longer periods of time, despite some volatility along the way.
A few months ago I saw a research report about McDonald's (NYSE:MCD) from the 1960's. It was funny to see the comments about earnings and the number of stores the company was planning to open. At the time the numbers were very important, but none of those numbers could help predict the success of the company.
The Concentrated Portfolio Of Great Companies
Here's the list, followed by a financial summary:
Consumer / Retail
- Wells Fargo (NYSE:WFC)
- JP Morgan (NYSE:JPM)
- Bank of America (NYSE:BAC)
- Citigroup (NYSE:C)
- AIG (NYSE:AIG)
Real Estate / Hotels
- Global leaders - Boeing is the best example of a global leader.
- Exposure to emerging markets - Some of these are blue chip American companies, but the growth driver for many are emerging markets. Examples include: Wal-Mart, Starbucks, Citigroup, Wynn, Starwood, Boeing, Ford and General Motors.
- Business models with durability - In a few decades, we will probably still drink coffee, brush our teeth, borrow money, stay at a hotel and travel by airplane or car.
- Cash flow and dividends (or the potential for dividends).
Buy And Hold Is Not Buy And Forget
Ideally, I will buy and hold the stocks of the companies in the "Concentrated Portfolio Of Great Companies." But, I plan on maintaining and active approach to following the companies.
Jim Chanos, the noted short seller, said that more companies go bankrupt than succeed in perpetuity. There is no guarantee that a great company today will continue to succeed in the future.
Most investors focus on quarterly earnings and recent financial performance. However, management teams make subtle decisions about investing in growth, capital allocation, acquisitions, leverage, etc. that can have a big impact over the long term, but may be hardly visible over the short term. These are the crucial decisions that matter most for long-term investors.
I plan to write more about these companies, but here are my recent articles about some.
- Bullish On Chefs' Warehouse: 60% Upside Potential In 1-2 Years And Great Long-Term Story
- Bullish On Wal-Mart: Revisiting Long-Term Thesis
- Bullish On Wal-Mart As Record Highs Demand A New Approach To The Stock
- Is Ford's 13% Pullback A Good Entry Point?
Companies And Stocks
Over short periods of time there may be a difference between a great company and a great stock. This list helps me focus, but I am not necessarily going out and buying all of these stocks tomorrow. Please do your own homework.
The "Concentrated Portfolio Of Great Companies" represents the companies that I believe in for the long term. I am always looking to buy more of these companies on pullbacks and hope to hold them for many years or decades.
I expect these companies to perform well on a multi-year timeframe. There will be volatility along the way, but if they can continue their business success then the stock prices will react accordingly.
I hope to write about each of these companies in detail, so please stay tuned.
There are also some other companies that I may add to the list in the future. What companies would you add?
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Disclosure: I am long AIG, BA, C, C, CHEF, CL, F, GE, GM, HOT, JPM, MGM, O, SBUX, WMT, WYNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I may trade any of the securities mentioned in this article at any time, including in the next 72 hours.