Portfolio management can be a complicated business. But what if someone told you that the best investing strategy is to have no strategy at all? That’s right: simply buy a stock, forget about it, and never, ever sell. Seems too simple?
Well, research by Fidelity Investments found that their best performing accounts appeared to be those belonging to investors who had passed away or, similarly, investors who had forgotten about their assets and left their portfolios untouched.
Pundits tried to explain this discovery in a variety of ways, but, regardless of the underlying reasons for the finding, it points strongly to the conclusion that doing nothing is often the most rewarding path when it comes to investing.
This shouldn’t be too surprising. Accountants have recognized compounding effects for centuries, and any approach that takes human error out of the equation should surely let those forces run their natural course.
So, if the fire and forget theory really works, which stocks would be best to buy if you yourself wanted to employ this powerful strategy?
Berkshire Hathaway Inc.
You need look no further than Warren Buffett’s very own Berkshire Hathaway conglomerate to prove that compounding really does reap rewards over the long-term. Class A (BRK.A) stock in the Oracle of Omaha’s famous investment vehicle are now the world’s most expensively traded shares, changing hands for the princely sum of $430,901.00 at the time of writing.
Granted, most companies would have initiated a stock split long before shares reached a price as high as that, but nevertheless, it demonstrates just what a quality stock can achieve if given a few decades to run its course.
If the cost of a Berkshire Hathaway Class A share seems a little too steep, there’s always its Class B (BRK.B) variety to incite the curious investor into buying.
Berkshire created the Class B shares so that regular investors could profit from the company’s fortunes, but at a more reasonable entry price. These shares don’t confer the same voting rights are Class A shares do, but they do give you the flexibility to add more to your portfolio over time – and might even excel in returns over their Class A counterparts if a stock split is ever on the cards.
Johnson & Johnson
While Johnson & Johnson (JNJ) shares the accolade of being the joint-oldest company on our list with American Water Works, it’s also the highest yielding dividend stock on it too.
The 135-year-old multinational corporation has been good to investors, rewarding them with a solid forward dividend-to-price ratio of 2.45% – well above the S&P 500 average of just 1.82% – and a consecutive dividend payout rise that’s now unbroken for 59 years. That makes the company not just a Dividend Aristocrat, but a Dividend King as well.
And if that’s not enough to entice you to buy JNJ, maybe the firm’s impeccable business fundamentals will seal the deal. Johnson & Johnson capped off a second quarter earnings report with a revenue and bottom line beat, and raised its top end 2021 sales guidance to $93.3 billion.
Johnson & Johnson’s involvement in the Covid-19 vaccination program also gives it some long-term skin-in-the-game when it comes to generating revenues in the fight against the global coronavirus pandemic.
The company recently got a boost in this regard after studies found that an additional dose of its single-dose Covid jab resulted in a nine-fold rise in antibodies 28 days after administration.
JNJ’s initial vaccine offering hit some early roadblocks, but the firm now looks like it’s on course to play a crucial when the forthcoming booster shot roll-out begins shortly.
It always good to buy a company when it’s valued at its lowest point; but what if a stock is as cheap today as it’s ever going to be? Many investors would look at a business like Microsoft (MSFT) and conclude that a company at its very top – which MSFT is right now – is one to assiduously avoid.
But this logic would have meant you’d have passed over Microsoft at $55 in December 2015. And that would have been a mistake – the company trades for $300 today, and since 2016 its share price has almost never looked back.
Making the case for Microsoft isn’t difficult. MSFT is not overvalued, despite its recent run-up, and is still a stock you can buy and hold on to for as long as you like.
Microsoft is practically a growth stock, with multiple business lines that exploit secular trends such as cloud adoption and increased tech consumption.
The company has staggeringly high profitability metrics – its gross profit margin is at 69%, comparable to the Information Technology median of 49% – and on a valuation basis its price-to-sales ratio of just under 12 is modest, especially given the latest rally on its market share price.
Ignore MSFT’s peak prices and let its underlying value do the work.
Visa (V) is a high margin business with a huge customer reach, taking a friction-free profit every time anyone uses its product. And that happens a lot: Visa operates the largest credit card network anywhere in the world, and as such it’s pretty much the perfect company to guarantee long-term growth.
If cash flow is king, then Visa is an emperor. There are currently 3.6 billion Visa cards in circulation, generating a total of $11 trillion in transaction volumes in 2019.
With lofty margins of 66%, Visa easily converts this into bottom line earnings, taking $2.6 billion in net income from revenues of $6.1 billion in the last quarter.
This also results in extremely liquid free cash flows of more than $4 billion, which the company can use to investor’s benefit by repurchasing stock and issuing a dividend worth $1.28 per share.
For a secure and reliable stock, few companies rival Visa’s stability and robustness in an ever-changing market.
American Water Works Company, Inc.
We’re highlighting boring stocks in this article, and, on the face of it, they don’t come much more boring than American Water Works (AWK).
The stolid utilities play is a favorite among sustainability-oriented value investors, and it’s easy to see why. The company grew its share price more than 140% over the last five years, and it’s a regular feature in the Corporate Knights Global 100 ranking too, proving the company’s clean revenue characteristics and environmentally friendly corporate practices.
In fact, in a twist of irony, AWK is actually outperforming the wider market as the global climate crisis begins to take hold. Drier-than-usual weather patterns have seen demand for the company’s services shoot up, resulting in an EPS rise of 18% year-on-year.
If climate change is here to stay, then AWK should be a permanent feature in every person’s portfolio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.