Secrets of Long-Term Investing Revealed

“........... long-term investing isn’t about having a great system, or a superior analytic intellect, or better access to information, or even the best advice money can buy.  Long-term investing is about character, about depth of vision and the cultivation of patience, about who you are and who you’ve made yourself to be”

The Single Best Investment, page 149

What is long-term investing? 

Long-term investing is the process of buying and holding investment securities you believe will compound investor wealth indefinitely into the future.

Why You Need to Become a Long-Term Investor

There are 3 good reasons to become a long-term investor:

1. It reduces fees
2. It requires less of your time
3. It is highly effective

Long-term investing is so successful is because of its beneficial psychological ramifications.  

If you invest for the long-term, you will focus on businesses with strong and durable competitive advantages that have a chance of compounding your wealth for decades, not days.

Long-Term Investing Strategy

The strategy long-term investors follow is straight-forward:

• Identify companies with durable competitive advantages
• Be sure these companies are in slow changing industries
• Invest in these companies when trading at fair or better prices

Three favorite slow changing industries are:

• Insurance
• Health care
• Food and beverage

To find if a company is trading at ‘fair or better prices’, a few metrics are important.

• If the company is trading below the market price-to-earnings ratio, its peer’s price-to-earnings ratio, and its 10 year historical average price-to-earnings ratio, it is likely undervalued.  
• These 3 relative price-to-earnings ratios will help to paint a picture of if a stock is ‘in favor’ or ‘out of favor’.  

As a general rule, it’s best to buy great businesses at a discount – when they are out of favor.

Another good metric to look at for determining value is a company’s expected payback period.

• Payback period is calculated using an expected growth rate and a stock’s current dividend yield.  
• The higher the dividend yield and expected growth rate, the lower the payback period.  
• The payback period is the number of years it will take an investment to pay you back.  
• Obviously, the lower the payback period, the better.

Long-Term Investing Examples

Warren Buffett’s investment history is perhaps the best example of long-term investments.  Three of his longest running investments are below:

• Wells Fargo (WFC) – 25% of his portfolio – First purchased in 1989
• Coca-Cola (KO) – 15% of portfolio – First purchased in 1988
• American Express (AXP) – 11% of portfolio – First purchased in 1964

All of these three investments are 25 years old or older.

The American Express investment is especially impressive.  Warren Buffett has held American Express for over 50 years!

Stocks for Long-Term Investors

• Find high quality dividend growth stocks suitable for long-term investors.
• Identify high quality dividend growth stocks trading at fair or better prices.
• Have a brief list of blue-chip stocks worthy of long-term investors that are currently trading at fair or better prices.

For example:  One for each sector of the economy is shown:

• Basic Materials: Phillips 66 (PSX)
• Consumer Goods: General Mills (GIS)
• Financial: Aflac (AFL)
• Health Care: Johnson & Johnson (JNJ)
• Industrial Goods: Deere & Company (DE)
• Service: W.W. Grainger (GWW)
• Technologies: Verizon Wireless (VZ)
• Utilities: Southern Company (SO)

Long-Term Investing Is Difficult

Long-term investing is not easy.

It is psychologically difficult to hold a stock when its price is declining.

Holding through price declines takes real conviction (remember the marriage analogy?).

The nearly infinite liquidity of the stock market combined with the ease of trading makes selling stocks something you can do on a whim.

But just because you can, doesn’t mean you should.

The constant stream of stock ticker price movements also coerces individual investors into trading unnecessarily.

• Does it really matter that a stock is up 1% today, or down 0.3% this hour?  
• Have the long-term prospects of the business really changed?  

Probably not.

To compound these problems even further, the financial media promotes rapid action.

• To garner views and attention, financial pundits have become LOUD.  
• They are always promoting the next great stock to buy, or which one MUST be sold.

The Cure:  Watch Dividends, Not Stock Prices

Stock prices lie.

• They signal a business is in steep decline, when it isn’t.  
• They say a company is worth 3x as much as it was 3 years ago, when the underlying business has only grown 50%.  
• Stock prices only represent the perception of other investors.  
• They do not and cannot show the real total returns an investment will generate.

Instead of watching stock price, avoid them completely.

Look at dividend income instead.

• Dividend do not lie.  
• A business simply cannot pay rising dividends for any protracted period of time without the underlying business growing as well.

Dividends are much less volatile than stock prices.

• Dividends reflect the real earnings power of the business.  
• As a result, it makes sense to track dividend income rather than stock price movement.  
• After all, don’t you care what your investment pays you more than what people think about your investment?

The Difference Between Buy & Hold and Long-Term Investing

There is a difference between buy and hold (sometimes called buy and pray) investing and long-term investing.

Buy and hold investing typically means buying and holding no matter what.

That’s not what long-term investing is about.

Sometimes, there is a very good reason to sell a stock.  It just happens much less frequently than most people believe.

Two reasons to sell a stock:

1. If it cuts or eliminates its dividend payments
2. If it becomes extremely overvalued

The first reason to sell is intuitive.

• When a stock cuts its dividend, it violates your reason for investing. 

The second reason to sell is in the case of an extreme overvaluation.

• I’m not talking about when a stock moves from a price-to-earnings ratio of 15 to 25.  
• I’m talking about when a stock is trading for a ridiculous price-to-earnings ratio; something like 40+.  
• An important caveat to remember is to always use adjusted earnings for this calculation.  
• If a cyclical stock’s earnings temporarily fall from $5.00 per share to $1.00 per share, and the price-to-earnings ratio jumps from 15 to 75, don’t sell.  
• In this instance, the price-to-earnings ratio is artificially inflated because it is not reflecting the true earnings power of the business.  

Selling due to extreme valuations should only occur very rarely, during extreme bouts of irrational market exuberance.

Final Thoughts

Investing for the long run is simple, but not easy.

It is psychologically difficult.

The amazing success records of investors who believe a long-term outlook is critical for favorable investment returns lends credibility to the idea of long-term investing.

The financial media does not typically discuss the merits of long-term investing because it does not generate fees for the financial industry, and it does not lend itself to flashy headlines or catchy sound bites.

Invest in high quality dividend growth stocks for the long-run.

• High quality dividend growths stocks with strong competitive advantages offer individual investors the best available mix of current income, growth, and stability as compared to other investment strategies and styles.

Long-term investing requires conviction, perseverance, and the ability to do nothing when others are being very active with their portfolios.

Do you have what it takes to invest for the long run?

Read:
http://www.smarteranalyst.com/2015/11/16/secrets-of-long-term-investing-revealed/

http://www.amazon.com/The-Single-Best-Investment-Creating/dp/0965175081/ref=cm_cr_pr_product_top?ie=UTF8  (Click on the book to get a sample of the pages within.)

This is a very good thing.

Keeping a long-term perspective will continue to be the key to success.

As long as you have picked a long-term strategy that makes sense and you believe in.

Warren Buffett - The Long Term Investor

"All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies."  Warren Buffett

Patience and pricing are once again your main allies.

Warren Buffett bought into Coca Cola when its share price was at one of its lowest points, well below the average, and still holds the stock to this day.

Learn How to Invest like Warren Buffett

http://www.buffettsbooks.com/index.html

http://www.youtube.com/user/BuffettsBooks/videos (38 videos)

Course 1

Introductory Lessons to Value Investing

Course 1 Lesson Plan

Course 2

Intermediate Lessons to become an Intelligent Investor

Course 2 Lesson Plan

Course 3

Advanced Lessons to Security Analysis

Course 3 Lesson Plan

Investing for the Long Run

Introduction
The difference of only a few percentage points in investment returns 
or interest rates can have a huge impact on your future wealth. 
Therefore, in the long run, the rewards of investing in stocks can 
outweigh the risks. We'll examine this risk/reward dynamic in this 
lesson.

Volatility of Single Stocks
Individual stocks tend to have highly volatile prices, and the returns
you might receive on any single stock may vary wildly. If you invest
in the right stock, you could make bundles of money. For instance,
Eaton Vance EV, an investment-management company, has had the
best-performing stock for the last 25 years. If you had invested
$10,000 in 1979 in Eaton Vance, assuming you had reinvested all
dividends, your investment would have been worth $10.6 million by
December 2004.

On the downside, since the returns on stock investments are not
guaranteed, you risk losing everything on any given investment.
There are hundreds of recent examples of dot-com investments that
went bankrupt or are trading for a fraction of their former highs.
Even established, well-known companies such as Enron, WorldCom,
and Kmart filed for bankruptcy, and investors in these companies
lost everything.

Between these two extremes is the daily, weekly, monthly, and
yearly fluctuation of any given company's stock price. Most stocks
won't double in the coming year, nor will many go to zero. But do
consider that the average difference between the yearly high and
low stock prices of the typical stock on the New York Stock
Exchange is nearly 40%.

In addition to being volatile, there is the risk that a single company's
stock price may not increase significantly over time. In 1965, you
could have purchased General Motors GM stock for $50 per share
(split adjusted). In the following decades, though, this investment
has only spun its wheels. By June 2008, your shares of General
Motors would be worth only about $18 each. Though dividends


would have provided some ease to the pain, General Motors' return
has been terrible. You would have been better off if you had
invested your money in a bank savings account instead of General
Motors stock.

Clearly, if you put all of your eggs in a single basket, sometimes that
basket may fail, breaking all the eggs. Other times, that basket will
hold the equivalent of a winning lottery ticket.

Volatility of the Stock Market
One way of reducing the risk of investing in individual stocks is by
holding a larger number of stocks in a portfolio. However, even a
portfolio of stocks containing a wide variety of companies can
fluctuate wildly. You may experience large losses over short periods.
Market dips, sometimes significant, are simply part of investing in
stocks.

For example, consider the Dow Jones Industrials Index, a basket of
30 of the most popular, and some of the best, companies in America.
If during the last 100 years you had held an investment tracking the
Dow, there would have been 10 different occasions when that
investment would have lost 40% or more of its value.

The yearly returns in the stock market also fluctuate dramatically.
The highest one-year rate of return of 67% occurred in 1933, while
the lowest one-year rate of return of negative 53% occurred in 1931.
It should be obvious by now that stocks are volatile, and there is a
significant risk if you cannot ride out market losses in the short
term. But don't worry; there is a bright side to this story.


Over the Long Term, Stocks Are Best
Despite all the short-term risks and volatility, stocks as a group have
had the highest long-term returns of any investment type. This is an
incredibly important fact! When the stock market has crashed, the
market has always rebounded and gone on to new highs. Stocks have
outperformed bonds on a total real return (after inflation) basis, on
average. This holds true even after market peaks.

If you had deplorable timing and invested $100 into the stock market
during any of the seven major market peaks in the 20th century,
that investment, over the next 10 years, would have been worth
$125 after inflation, but it would have been worth only $107 had you
invested in bonds, and $99 if you had purchased government
Treasury bills. In other words, stocks have been the best-performing
asset class over the long term, while government bonds, in these
cases, merely kept up with inflation.

This is the whole reason to go through the effort of investing in
stocks. Again, even if you had invested in stocks at the highest peak
in the market, your total after-inflation returns after 10 years would
have been higher for stocks than either bonds or cash. Had you
invested a little at a time, not just when stocks were expensive but
also when they were cheap, your returns would have been much
greater.


Time Is on Your Side
Just as compound interest can dramatically grow your wealth over
time, the longer you invest in stocks, the better off you will be.
With time, your chances of making money increase, and the volatility
of your returns decreases.

The average annual return for the S&P 500 stock index for a single
year has ranged from negative 39% to positive 61%, while averaging
13.2%. After holding stocks for five years, average annualized returns
have ranged from negative 4% to positive 30%, while averaging 11.9%.
These returns easily surpass those you can get from any of the other
major types of investments. Again, as your holding period increases,
the expected return variation decreases, and the likelihood for a
positive return increases. This is why it is important to have a long term
investment horizon when getting started in stocks.


Why Stocks Perform the Best
While historical results certainly offer insight into the types of
returns to expect in the future, it is still important to ask the
following questions: Why, exactly, have stocks been the best
performing asset class? And why should we expect those types of
returns to continue? In other words, why should we expect history
to repeat?


Quite simply, stocks allow investors to own companies that have the
ability to create enormous economic value. Stock investors have full
exposure to this upside. For instance, in 1985, would you have
rather lent Microsoft money at a 6% interest rate, or would you have
rather been an owner, seeing the value of your investment grow
several-hundred fold?

Because of the risk, stock investors also require the largest return
compared with other types of investors before they will give their
money to companies to grow their businesses. More often than not,
companies are able to generate enough value to cover this return
demanded by their owners.


Meanwhile, bond investors do not reap the benefit of economic
expansion to nearly as large a degree. When you buy a bond, the
interest rate on the original investment will never increase. Your
theoretical loan to Microsoft yielding 6% would have never yielded
more than 6%, no matter how well the company did. Being an owner
certainly exposes you to greater risk and volatility, but the sky is also
the limit on the potential return.


The Bottom Line
While stocks make an attractive investment in the long run, stock
returns are not guaranteed and tend to be volatile in the short term.
Therefore, we do not recommend that you invest in stocks to
achieve your short-term goals. To be effective, you should invest in
stocks only to meet long-term objectives that are at least five years
away. And the longer you invest, the greater your chances of
achieving the types of returns that make investing in stocks
worthwhile.

Quiz 
There is only one correct answer to each question.
1 The average yearly difference between the high and low of the
typical stock is between:
a. 30% and 50%.
b. 10% and 30%.
c. 50% and 70%.

2 If you were saving to buy a car in three years, what percentage of
your savings for the car should you invest in the stock market?
a. 50%.
b. 70%.
c. 0%.

3 If you were investing for your retirement, which is more than 10
years away, based on historical returns in the 20th century, what
percentage of the time would you have been better off by
investing only in stocks versus a combination of stocks, bonds,
and cash?
a. 50%.
b. 100%.
c. 0%.

4 Well known stocks like General Motors:
a. Always outperform the stock market.
b. Are too highly priced for the average investor.
c. Can underperform the stock market.

5 Which of the following is true?
a. After adjusting for inflation, bonds outperform stocks.
b. When you invest in stocks, you will earn 12% interest on your
money.
c. Stock investments should be part of your long-term
investment portfolio.



http://news.morningstar.com/classroom2/course.asp?docId=142859&page=1&CN=COM

Warren Buffett Interview from India

The Average Investor Is Better Off Trading Long-Term

By Arthur, The Stock Investor Home
Investor are often reminded by the stockmarket that their shares value can go up (the bull) as well as down (the bear).  That is why people who tried to time the market can never beat it.  It is also the number one reason why people who tried to time the market will only end up losing money again and again.
 
One of the best time study was to "sell in May" and keep away from the market.  This is a method which was once used by traders and coined by the Hirch organization who publish the Stock Traders Almanac.  What they published was a fascinating stat that says that since 1950, if you invested $10,000 in the market at the beginning of November and held it to April of every year, you would have $536,000 currently. If you had done the same thing but invested from May to October, you would actually have a loss of $236.  You might want to give this time study investing method a tried but at your own risk.
 
Study have shown that for the average investor who have a full-time job on hand, they are better off investing for the long-term and ignore the short-term volatility of the share market.  Remember, short-term volatility is only importance to short-term investor.  As long you as you keep your long-term financial goal in mind and average the number of shares in good and bad time, the average long-term investor are going to perform much better than any short-term trader.
 
The secrets to consistently outperform any stock market indices no matter where you lived is very simple.  Since 1925, common stocks have generated an average annual rate of return of around 9-10 percent versus 3-5 percent for government bonds.  In addition, stocks have been one of the only investments that have consistently outpaced inflation over time.
 
Time is the best way to ride out any volatility.  Time have repeatedly show you that the stock market share value will recover and your share prices will once rise again.  That is why Warren Buffett favourite holding period for stock is FOREVER.  To benefits from the test of time, you must select your company stock carefully for investment.  Go for large companies such as Coca-Cola which you know that it will be around for many centuries.  Diversify your stock investment to not more than 10 companies.  Diversification works only if your don't OVER diversify.
 
No one in the stock investment world can consistently out-perform or beat the market.  Successful investor DO NOT tried to beat the market.  What they do is to keep their long-term financial goal in mind and invest using Fixed Cost Averaging, Time Diversification, and Investment Fund Diversification in Large Companies listed on stock exchange.
 
Don't bother to listen to any financial news, all they do is to constantly keep you in fear.  They are in the business of providing the financial buzz, they are not in the business to educate you to become a better stock investor.
 
To conclude, always keep your investing method simple.  Make used of the time tested formula and invested a fixed amount monthly.  Let the power of time and compound interest do it magic tricks for you.

http://www.sap-basis-abap.com/shares/the-average-investor-is-better-off-trading-long-term.htm

Buffett (1991): Highlight a simple fact that the probability of success in investing increases manifold if one is focused on building a portfolio that comprises of companies with the best earnings growth potential from a 10-year perspective.

We saw how Warren Buffett gained significantly from the phenomenon of 'double-dip' that engulfed two of his investment vehicle's best holdings and how we as investors, stand to benefit from the same. In the following write-up, let us see what other tricks the master has up his sleeve through the remainder of his 1991 letter to his shareholders.

"We believe that investors can benefit by focusing on their own look-through earnings. To calculate these, they should determine the underlying earnings attributable to the shares they hold in their portfolio and total these. The goal of each investor should be to create a portfolio (in effect, a "company") that will deliver him or her the highest possible look-through earnings a decade or so from now.

An approach of this kind will force the investor to think about long-term business prospects rather than short-term stock market prospects, a perspective likely to improve results. It's true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard."

Yet again, the master's crystal-clear thinking and his ability to draw parallels between investing and other fields shines through in the above quote. The master is trying to highlight a simple fact that the probability of success in investing increases manifold if one is focused on building a portfolio that comprises of companies with the best earnings growth potential from a 10-year perspective. However, this is easier said than done. The attention of a multitude of investors in the stock markets is focused on the stock price rather than the underlying earnings. These gullible sets of investors seem to confuse between cause and effect in investing. One must never forget the fact that it is the earnings that drive the returns in the stock markets and not the prices alone. Thus, any strong jump in prices without a concomitant rise in earnings should be viewed with caution.

However, if the trend in the Indian stock market these days is any indication, investors seem to be turning a blind eye towards earnings growth and are buying into equities with promising growth prospects but very little actual earnings to justify the price rise. The risk of indulging in such practices becomes clear when one considers the tech mania of the late 1990s. In anticipation of strong earnings, investors had bid up the price of a lot of tech stocks to such levels that when the earnings failed to meet the lofty expectations, prices crashed, resulting into huge capital erosion. But alas, the investor memory seems to be very short and a similar event is waiting to be played out, although this time in some other sectors.

Hence, one would do well to heed to the master's advice and try and focus not on the stock prices but the underlying earnings. Further, the master is also in favour of having a 10 year view so that the tendency of investors to invest based on a short term view of things gets nipped in the bud and there emerges a portfolio, having companies with a proven track record and a strong and credible management team at the helm.

http://www.equitymaster.com/detail.asp?date=11/15/2007&story=2

Most investors take on a very short term outlook and ultimately make very little money, if at all..

So many people today want to know how to find good stock picks for their portfolio. They are always looking for  next hot stick tip that they can make a killing off in the next 30 days.  The problem with most investors is that they take on a very short term outlook. This is the same of most business owners. In both business and stock investing, it's only a small minority who ever make a significant amount of money. 


Why is this? Instead of committing to a strategy and sticking to it long term, the vast majority become so focused on finding that 'get rich quick' scheme they will jump from one stock to the next, and ultimately make very little money at all. 


The bottom line is, there is no 'hot stock tip' or good stock picks that are guaranteed to make you a fortune overnight. Yes, some investors have gotten lucky and made a fortune in a week. However, often times those same investors lose their entire profit in a very short period of time by continuing to employ the same strategy. When you take on a short term outlook in your investing, you switch from being an investor to a gambler. 


Warren Buffet doesn't worry one bit how his stock does short term. What he considers good stock picks much different than most investor, because he's looking for long term return on investment. If the world's top investor invests for the long term; doesn't it make sense to model that success? Yes, you can make some money short term, but like gambling, you will always lose in the long run.

The reason the market is so volatile today is the get rich quick scheme. Think about it-instead of picking an investment they can be sure will work for them for years to come, most investors jump in when they feel they can make a quick buck. They continue checking in on their investment all the time. As soon as it starts going down, because they didn't do their research and don't know the long term prospects of the company, they panic and sell out. When thousands follow this same mentality, chaos ensues. This is exact the same behavior that caused the market crash of 1929, and what will continue to be responsible for the volatile up and down turns of the market.

Do yourself and the market a favor, and invest for the long term. The only good stock picks are companies that have exhibited a good profit margin for years and possess favorable future outlook. You will be ensuring your long term wealth, and you will be contributing to a stronger and more predicable economy. 

http://sellingstock.fretail.com/good-stock-picks-to-invest/

Mary Buffett - Warren Buffett and Long-Term Investing