You can have one share only -- forever. What's it to be?
If you had to pick, today, one share for the rest of your life, what would it be and why?
To take this strange hypothesis a little further, I'm going to add a few conditions:
- The share constitutes your entire sum of investments.
- It needs to pay your future pension.
- You will need to keep adding investments into the same company (and that company only) from your earnings until your retirement.
- It may not be a collective investment such as an investment trust.
- You may not sell any of the shares before retirement -- when you may decide to sell off parcels to live on, and/or take the dividends.
So what's the point in all this?
Well clearly, such a policy would be ridiculous -- but it's surprising how many private investors feel confident enough to sail pretty close to such a scenario with a "bet the farm" type approach -- or are guilty of "falling in love" with a share.
But a farm bet is often more about seeing conspicuous value come out in a timely fashion -- as opposed to a long-term buy and hold forever approach.
Warren Buffett's view
My point is that if the majority of your share-based investments come reasonably close to fulfilling the requirement of being the one to have and to hold, forsaking all others, then you're probably aiming in the right direction.
If not there's a problem -- and it's one I suffer from. As Warren Buffett said 20 years ago:
"An investor should act as though he had a lifetime decision card with just twenty punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life."
In other words, most long-term investors will enjoy superior returns from a relatively small number of shrewd decisions. But how do you identify such shares? What characteristics would they exhibit?
The Motley Fool Self Select Stocks & Shares ISA
Invest up to £10,680 per tax year in any of our ISA eligible investments,
with any profits made on your investments free from Capital Gains Tax.*
Our Self Select Stocks & Shares ISA enables you to benefit from all great features
of The Motley Fool Share Dealing Account. You can buy shares in seven
of the world's largest markets with our fully comprehensive dealing account.
Click here to find out more or to open an account
The value of your investments and the income from them can go down as well as up.
You may not get back the full amount you have invested. *Tax laws may be liable to change.
Things to look for
I would say the company you seek should:
- be growing at a reasonable rate;
- demonstrate basic good value credentials such as a lower than average price-to-earnings ratio, a strong balance sheet and good cash flow;
- have a history of steadily increasing earnings and an above average yield;
- supply essential products or services and have a "moat" in so doing;
- be trustworthy and prudent; and
- have a lower average enterprise value to sales ratio than its peers.
There aren't many companies around that tick all these boxes in the good times. Back in the spring of 2009, they were easy to find on very low ratings -- and many of us made hay while the bearish sun shone.
But that was more about seeing value come out than a hold forever Buffett-type approach.
For example, Carr's Milling Industries (LSE: CRM) came close to being the perfect investment two years ago. The price has doubled since then, but the company continues to meet the above criteria.
Whereas with Volex (LSE: VLX), a couple of months earlier, the inherent value was riskier and came out manifold over the following months -- but this isn't a share I'd still be wanting to hold today at 13 times the price.
Today, if I had to buy one share to have and to hold, then in reality an investment trust may be a good idea.
Individually, oil giants BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), big insurers giants Aviva (LSE: AV) and RSA Insurance Group (LSE: RSA), supermarket chains Sainsbury (LSE: SBRY), Morrison (LSE: MRW) and Tesco (LSE: TSCO), and utility stalwart Scottish & Southern Energy (LSE: SSE) would all be candidates for me -- but none is perfect.
What would be your suggestions -- let us know below.
More from David Holding:
> David owns shares in Carr's Milling Industries, BP, Royal Dutch Shell, Aviva, RSA Insurance, Sainsbury, and Scottish & Southern Energy. The Motley Fool owns shares in Tesco.
> Claim your FREE financial guides -- The Motley Fool has teamed up with a number of partners to offer our users free financial guides on topics such as tax planning, funds and much, much more. Click here to download your reports today!