I recently read an article where the author was advising readers to invest in the equity markets for the long term. His suggestion was to buy for the long term of at least 15 years and he offered several criteria on how to pick stocks.
The criteria for a “proper” long term investment were:
- Products that can endure and aren’t fads
- A history of leaders who can adapt
- A strong balance sheet
- A benign competitive environment
- A track record of innovation balanced by vigilance against taking on too much risk
- A strategy that looks beyond the next year and certainly beyond the next quarter
I have often heard that old saying, “It isn’t timing the markets that makes for success, it is time in the markets.” This suggests that market timing for most investors is pointless or cannot be done and an investor that just stays long for a while will eventually succeed in achieving their financial goals.
Any of our students or any attendee of Online Trading Academy’s workshops knows that is simply not true. Famous hedge fund manager Paul Tudor Jones once said, “I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.” (source: Business Insider)
The author of the aforementioned article also suggested seven “quality” stocks that fit his criteria for a 15 year investment. He said that you should look for an average annual return of 12%. They were: BA, WRE, NFLX,CMG, DIS, FDX, and WFM.
So I was curious to see how those stocks would have done if you invested in them about 10 years ago. In late 1995, the markets were very bullish but experienced a slowdown similar to the one we are seeing now. So how did the stock picker do?
BA was trading at about $70 and is now at $122. That is a 74% ROI or about 8% annually.
WRE was at $32 and is now $27, a 15% loss.
NFLX was a home run and turned a $29 investment into $455, a 1468% return and 168% per year.
DIS went from $26 to $86 and saw a 230% gain, about 25% per year.
WFM is nearly back to its $35 starting price at $37. This is a measly 5% gain and 0.6% annually.
FDX was in the red from its $104 purchase price for seven years before jumping to $155. This yielded 5% a year for a total of 49% return.
CMG gave you a whopping 1353% return, moving to $657 from its $45 IPO price in 2006. That is if you held on for three years as it moved sideways until 2009.
What you have to ask yourself is if you believe that these stocks can go through another meteoric rise as they have in the past. History shows that this is unlikely and if you chased stocks like NFLX, you would have probably been shaken out when it plummeted from its previous all time highs.
As you can see, applying Online Trading Academy’s core strategy to these investments would have been profitable and even turned losers into winners.
Even CMG offered a safer entry if you timed it using our strategy.
If you are not timing the tops and bottoms like the professionals, you need to learn how to do so as it will allow you to achieve a greater level of success in your investing and trading. It can be done.