2 Unstoppable Stocks to Buy and Hold for Decades
If you invest for the long term, you don't need to worry about short-term fluctuations in the market or what retail investors are betting on today. But in order to be able to just buy and forget, it's important to look at businesses that are both sound financially and likely to enjoy strong demand for its products for many years.
Two stocks that fall into that category are DexCom (NASDAQ:DXCM) and Microsoft (NASDAQ:MSFT). They're good buys today and look even better over the long haul.
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Diabetes is, unfortunately, a growing problem in the world. One in three Americans could have the illness by 2050, according to the Centers for Disease Control and Prevention. Luckily, DexCom and its continuous glucose monitoring devices can help patients manage the issue. Using small sensors that can be inserted under a person's skin, they make it easy to obtain glucose values and can relay and share those readings through an app. And the devices don't require finger pricks.
Demand for the company's products is likely to be around for a very long time, making Dexcom a sound long-term investment. The business itself has impressive margins and consistently posts strong profits. Its gross margin is a steady 69% of revenue over the trailing 12 months. Unsurprisingly, with that much left over after cost of goods sold, DexCom has also banked a 24% profit margin. The business has become more efficient over the years in keeping its expenses down (with respect to revenue), and if it can maintain these types of margins, there will be tons of profit growth in the future as sales continue to rise.
Through the first six months of 2021, DexCom reported $1.1 billion in revenue, which grew 28% year over year. Its net profit of $103 million rose by 56%. For the full year, the healthcare company projects that revenue will come in between $2.35 billion and $2.4 billion, growing at least 22% from 2020. But over the long term, there will undoubtedly be even more growth, and that's what makes DexCom an excellent option for investors who want a great stock they can buy and forget about.
Microsoft is an easy investment to justify over the long term. It's been a big name in its industry for decades, and that's unlikely to change. With so many different businesses that it can tap into for growth, Microsoft is versatile enough that it can change and adapt to ongoing trends.
One example is in the growing popularity of videoconferencing. Zoom Video Communications (NASDAQ:ZM) has experienced significant growth since the start of the pandemic, with people stuck at home and relying on its videoconferencing software for meetings (whether it was for business or any other reason). Since the beginning of 2020, the stock soared more than 300% while the S&P 500 increased by 40%. That wasn't an area of focus for Microsoft, but that has quickly changed for the tech company. Now, Microsoft includes videoconferencing capabilities in its Teams communication platform, which is designed to help businesses stay connected. Plus, it added a "Meet Now" option right within its Windows 10 operating system.
Microsoft is such a force that once it spots a trend, it can pour money into an area of its business to take advantage of it. With deep pockets (last fiscal year alone, it banked more than $61 billion in profit) and 1.3 billion devices that are currently using its Windows 10 software, it has the capability to easily reach users and deploy tools that can rival just about anything that's available in the marketplace today.
And with so many different products and services, Microsoft is a safe bet to meet the needs of its users for the long term. From gaming to office software to cloud computing, Microsoft has many segments in its business. In its most recent quarter, for the period ending June 30, the company posted revenue of $46 billion, which rose 21% year over year, and its net income of $17 billion rose by 42%. And more importantly, many of its segments experienced growth rates of more than 10%.
With stellar numbers, a solid user base, and diverse offerings, Microsoft is a company that is likely to be a relevant player in tech for a long time to come.
In this article, we discuss the 10 stocks to buy and hold for the long term according to Warren Buffett. If you want to skip our detailed analysis of these stocks, go directly to the 5 Stocks to Buy and Hold for Long Term According to Warren Buffett.
Value investing is an art that has been perfected by Warren Buffett, the Omaha-born investor who heads the Nebraska-based hedge fund named Berkshire Hathaway, over his more than five decades long career in the investing world. The fund, which has investments in 44 companies, manages more than $293 billion in assets. Buffett is presently worth over $103 billion and is the sixth most wealthy individual on the planet, per business news publication Forbes. Buffett has seen his wealth soar by $16 billion so far this year.
Most of this increase is a result of Buffett's investments that have offered him handsome returns. Some of the top stocks in the Berkshire Hathaway portfolio at the end of the second quarter of 2021 were Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO), among others. Buffett, who was awarded the US Presidential Medal of Freedom in 2011, has delivered a 20% compounded annual gain to investors since 1965.
After facing flak for years regarding his aversion to technology stocks, Buffett - who nonetheless outperformed the wider market with solid investments in value stocks over the period - has started dabbling in the growth sector as well. His returns have, to the surprise of nobody, trumped the stocks picks of seasoned market experts. Nubank, a Brazilian fintech firm backed by Buffett, is planning a $2 billion debut on the market in the coming days. BYD, a Chinese EV maker in which Buffett has held a stake for over a decade, has seen sales triple this year.
There is little doubt that Buffett is one of the, if not the most, successful investors of all time. His success is an exception in the investing world that has otherwise struggled to cope with technology-led changes in society. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
With this context in mind, here is our list of the 10 stocks to buy and hold for the long term according to Warren Buffett. The stocks mentioned below were picked from the investment portfolio of Berkshire Hathaway at the end of the second quarter of 2021. Only those companies were considered in which the firm’s stake remained unchanged in the second quarter compared to the holdings for the first quarter of 2021. These were then assembled in ascending order according to the present value of the holdings.
The analyst ratings for each company are discussed alongside other details to help readers with their investment choices. The hedge fund sentiment around each stock was gauged using the data of 873 hedge funds tracked by Insider Monkey.
Stocks to Buy and Hold for Long Term According to Warren Buffett
10. StoneCo Ltd. (NASDAQ: STNE)
Number of Hedge Fund Holders: 44
StoneCo Ltd. (NASDAQ: STNE) is placed tenth on our list of 10 stocks to buy and hold for the long term according to Warren Buffett. The firm operates from the Cayman Islands as a financial technology solutions provider. Regulatory filings reveal that Berkshire Hathaway owned more than 10.6 million shares in StoneCo Ltd. (NASDAQ: STNE) at the end of June 2021. The shares are valued at more than $717 million and represent 0.24% of the portfolio.
In March, investment advisory HSBC upgraded StoneCo Ltd. (NASDAQ: STNE) stock to Buy from Hold with a price target of $85. Neha Agarwal, an analyst at the advisory, issued the ratings update regarding the company.
At the end of the second quarter of 2021, 44 hedge funds in the database of Insider Monkey held stakes worth $2.7 billion in StoneCo Ltd. (NASDAQ: STNE), up from 39 the preceding quarter worth $2.1 billion.
Just like Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO), StoneCo Ltd. (NASDAQ: STNE) is one of the stocks to buy and hold for the long term according to Warren Buffett.
In its Q2 2021 investor letter, JDP Capital Management, an asset management firm, highlighted a few stocks and StoneCo Ltd. (NASDAQ: STNE) was one of them. Here is what the fund said:
“StoneCo (NYSE: STNE) has been in our portfolio since early 2019 and has appreciated 225% since. In the first half of 2021 the stock was down nearly 20% and was a drag on the fund’s performance.
Stone is a leading fintec company in Brazil that provides back-office software, loans and other financial services to small and medium sized businesses (SMBs). We have discussed Stone in past letters and the company’s “ladder up” from a card processor to a supplier of enterprise software used to sell financial products on top of such as working capital loans.
The company generates a lot of cash that it reinvests to acquire or build new financial products for its customer base. Since we invested, the company has grown the number of SMB clients by 3x, revenue by 2.3x, and net income by 2.2×11.
The pandemic’s impact on SMBs in Brazil has been severe, especially for the many retailers who are only now adopting an e-commerce strategy. In the first half of 2021 Stone increased loss provisions on its lending product, and overall growth has slowed somewhat. The stock’s decline earlier this year was not surprising, but investors are now ignoring progress that has enhanced Stone’s position for coming out much stronger when the recovery begins.
StoneCo Q1 2021 Earnings Call: “Based on (i) our learnings with lockdowns last year, (ii) recent client transactional data and (iii) learnings from the dynamics of countries where vaccines are widespread, we expect that once vaccination scale (which we think will happen in the second half of 2021), the economic recovery will be fast and – although delayed – Brazil is moving in the right direction. For these reasons, we have made an informed decision to be ready for recovery by investing in growth…”
“…In the first quarter, we decided to increase our salesforce headcount by 24%, marketing investments by 33%, customer service and logistics headcount by 32% and technology headcount by 20% in order to be the fastest player when our economy comes back to normal levels.”
“I want to start our presentation by highlighting that Brazil went through a second wave of COVID in the first quarter of ’21, which imposed commerce restrictions in several cities throughout the country. Those restrictions were felt by our clients with average TVP reaching a low in the end of March…
…But similar to the behavior we saw in the comeback from the first lockdown in 2020, we already observed significant and quick recovery with average TPV in May achieving levels above January 2021. As Thiago mentioned, we expect that once vaccinations are scaled, the economy recovery of the country will be fast.”
In terms of COVID recovery opportunities within our portfolio, Stone might be the most “coiled” because the impact on Brazilian small businesses has been so traumatic. In addition, Stone is part of a much larger and fast-moving transition happening in Brazil around the digitalization of financial services. The speed of this transition is unique to Brazil because the Central Bank is actively trying to reduce the country’s previous dependency on a small handful of large banks. Important progress in the first half of 2021 included closing on the long-awaited acquisition of Linx, a mature provider of enterprise software with a large footprint across Brazil. The acquisition will provide Stone meaningful cross-selling opportunities and a more diversified customer base.”
9. T-Mobile US, Inc. (NASDAQ: TMUS)
Number of Hedge Fund Holders: 100
T-Mobile US, Inc. (NASDAQ: TMUS) is ranked ninth on our list of 10 stocks to buy and hold for the long term according to Warren Buffett. The firm operates from Washington as a communications services provider. Berkshire Hathaway owned more than 5.2 million shares in T-Mobile US, Inc. (NASDAQ: TMUS) at the end of the second quarter of 2021. The shares are worth over $759 million and represent 0.25% of the portfolio.
On July 30, investment advisory Truist reiterated a Buy rating on T-Mobile US, Inc. (NASDAQ: TMUS) stock and raised the price target to $175 from $150, noting that the firm had exceeded expectations with core subscriber growth in the second quarter.
Out of the hedge funds being tracked by Insider Monkey, Greenwich-based investment firm Viking Global is a leading shareholder in T-Mobile US, Inc. (NASDAQ: TMUS) with 7.5 million shares worth more than $1 billion.
In addition to Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO), T-Mobile US, Inc. (NASDAQ: TMUS) is one of the stocks to buy and hold for the long term according to Warren Buffett.
8. STORE Capital Corporation (NYSE: STOR)
Number of Hedge Fund Holders: 13
STORE Capital Corporation (NYSE: STOR) is an Arizona-based real estate investment trust. It is placed eighth on our list of 10 stocks to buy and hold for the long term according to Warren Buffett. Latest data shows that Berkshire Hathaway owned more than 24 million shares in STORE Capital Corporation (NYSE: STOR) worth over $842 million at the end of June 2021, representing 0.28% of the portfolio.
On August 24, investment advisory Mizuho kept a Neutral rating on STORE Capital Corporation (NYSE: STOR) stock and raised the price target to $37 from $36, underlying several factors that should benefit the sector in which the firm worked.
At the end of the second quarter of 2021, 13 hedge funds in the database of Insider Monkey held stakes worth $899 million in STORE Capital Corporation (NYSE: STOR), the same as in the previous quarter worth $886 million.
Alongside Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO), STORE Capital Corporation (NYSE: STOR) is one of the stocks to buy and hold for the long term according to Warren Buffett.
7. Snowflake Inc. (NYSE: SNOW)
Number of Hedge Fund Holders: 70
Snowflake Inc. (NYSE: SNOW) is a California-based company that owns and runs a cloud data platform. It is ranked seventh on our list of 10 stocks to buy and hold for the long term according to Warren Buffett. Regulatory filings reveal that Berkshire Hathaway owned over 6.1 million shares in Snowflake Inc. (NYSE: SNOW) at the end of the second quarter of 2021. The shares are worth $1.4 billion and represent 0.5% of the portfolio.
On August 20, investment advisory Piper Sandler maintained an Overweight rating on Snowflake Inc. (NYSE: SNOW) stock with a price target of $290, highlighting that a selloff of the stock based on growth concerns was overdone.
At the end of the second quarter of 2021, 70 hedge funds in the database of Insider Monkey held stakes worth $12.5 billion in Snowflake Inc. (NYSE: SNOW), down from 71 in the preceding quarter worth $12.9 billion.
Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO) are some of the stocks to buy and hold for the long term according to Warren Buffett, just like Snowflake Inc. (NYSE: SNOW).
6. Mastercard Incorporated (NYSE: MA)
Number of Hedge Fund Holders: 156
Mastercard Incorporated (NYSE: MA) is placed sixth on our list of 10 stocks to buy and hold for the long term according to Warren Buffett. The firm operates from New York and markets payments processing services. Securities filings reveal that Berkshire Hathaway owned more than 4.5 million shares in Mastercard Incorporated (NYSE: MA) at the end of June 2021, representing 0.56% of the portfolio. The shares are valued at over $1.6 billion.
On August 17, investment advisory JPMorgan reiterated an Overweight rating on Mastercard Incorporated (NYSE: MA) stock and raised the price target to $430 from $427, noting that the firm was slated for a return to pre-pandemic growth in the second half of 2021.
Out of the hedge funds being tracked by Insider Monkey, Virginia-based investment firm Akre Capital Management is a leading shareholder in Mastercard Incorporated (NYSE: MA) with 5.8 million shares worth more than $2.1 billion.
Apple Inc. (NASDAQ: AAPL), Bank of America Corporation (NYSE: BAC), and The Coca-Cola Company (NYSE: KO) are some of the stocks to buy and hold for the long term according to Warren Buffett, along with Mastercard Incorporated (NYSE: MA).
In its Q4 2020 investor letter, Bretton Fund, an asset management firm, highlighted a few stocks and Mastercard Incorporated (NYSE: MA) was one of them. Here is what the fund said:
“While consumers resumed much of their spending by summer, what and how they used their Visas and Mastercards changed. For obvious reasons, people shifted to contactless payments—one of the Covid-era changes we think is permanent—and replaced travel purchases with online shopping and food delivery. Consumers spent more on their debit cards and less on their credit cards; Visa and Mastercard make more per transaction on the latter. They also make more on cross-border transactions that come mostly from international travel, which ground to a halt early in the pandemic. Visa’s and Mastercard’s earnings per share fell by 7% and 16%, respectively, compared to their usual mid-teens growth. We’re not too worried, and we think they’ll catch up nicely in the post-vaccine world. Visa’s stock returned 17.1% and Mastercard’s 20.2%.”
Click to continue reading and see 5 Stocks to Buy and Hold for Long Term According to Warren Buffett.
Disclosure. None. 10 Stocks to Buy and Hold for Long Term According to Warren Buffett is originally published on Insider Monkey.
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9 best long-term investments in October 2021
One of the best ways to secure your financial future is to invest, and one of the best ways to invest is over the long term. With the ups and downs that came during the COVID-19 pandemic, it may have been tempting to chase quick returns in 2021. But the economy is still recovering, and it’s more important than ever to focus on long-term investing while sticking to your game plan.
There are many people that think of investing as an easy way to make a short-term score in the markets, but it’s long-term investing where regular investors can really build wealth. By thinking and investing long term, you can meet your financial goals and increase your financial security.
Investors today have many ways to invest their money and can choose the level of risk that they’re willing to take to meet their needs. You can opt for very safe options such as a certificate of deposit (CD) or dial up the risk – and the potential return! – with investments such as stocks and stock mutual funds or ETFs.
Or you can do a little of everything, diversifying so that you have a portfolio that tends to do well in almost any investment environment.
Here are the best long-term investments in October:
- Growth stocks
- Stock funds
- Bond funds
- Dividend stocks
- Target-date funds
- Real estate
- Small-cap stocks
- Robo-advisor portfolio
- IRA CD
Overview: Top long-term investments in October 2021
1. Growth stocks
In the world of stock investing, growth stocks are the Ferraris. They promise high growth and along with it, high investment returns. Growth stocks are often tech companies, but they don’t have to be. They generally plow all their profits back into the business, so they rarely pay out a dividend, at least not until their growth slows.
Growth stocks can be risky because often investors will pay a lot for the stock relative to the company’s earnings. So when a bear market or a recession arrives, these stocks can lose a lot of value very quickly. It’s like their sudden popularity disappears in an instant. However, growth stocks have been some of the best performers over time.
If you’re going to buy individual growth stocks, you’ll want to analyze the company carefully, and that can take a lot of time. And because of the volatility in growth stocks, you’ll want to have a high risk tolerance or commit to holding the stocks for at least three to five years.
Risk/reward: Growth stocks are among the riskier segments of the market because investors are willing to pay a lot for them. So when tough times arrive, these stocks can plummet. That said, the world’s biggest companies – the Facebooks, the Alphabets, the Amazons – have been high-growth companies, so the reward is potentially limitless if you can find the right company.
2. Stock funds
If you’re not quite up for spending the time and effort analyzing individual stocks, then a stock fund – either an ETF or a mutual fund – can be a great option. If you buy a broadly diversified fund – such as an S&P 500 index fund or a Nasdaq-100 index fund – you’re going to get many high-growth stocks as well as many others. But you’ll have a diversified and safer set of companies than if you own just a few individual stocks.
A stock fund is an excellent choice for an investor who wants to be more aggressive but doesn’t have the time or desire to make investing a full-time hobby. And by buying a stock fund, you’ll get the weighted average return of all the companies in the fund, so the fund will generally be less volatile than if you had held just a few stocks.
If you buy a fund that’s not broadly diversified – for example, a fund based on one industry – be aware that your fund will be less diversified than one based on a broad index such as the S&P 500. So if you purchased a fund based on the automotive industry, it may have a lot of exposure to oil prices. If oil prices rise, then it’s likely that many of the stocks in the fund could take a hit.
Risk/reward: A stock fund is less risky than buying individual positions and less work, too. But it can still move quite a bit in any given year, perhaps losing as much as 30 percent or even gaining 30 percent in some of its more extreme years.
That said, a stock fund is going to be less work to own and follow than individual stocks, but because you own more companies – and not all of them are going to excel in any given year – your returns should be more stable. With a stock fund you’ll also have plenty of potential upside. Here are some of the best index funds.
3. Bond funds
A bond fund – either as a mutual fund or ETF – contains many bonds from a variety of issuers. Bond funds are typically categorized by the type of bond in the fund – the bond’s duration, its riskiness, the issuer (corporate, municipality or federal government) and other factors. So if you’re looking for a bond fund, there’s a variety of fund choices to meet your needs.
When a company or government issues a bond, it agrees to pay the bond’s owner a set amount of interest annually. At the end of the bond’s term, the issuer repays the principal amount of the bond, and the bond is redeemed.
A bond can be one of the safer investments, and bonds become even safer as part of a fund. Because a fund might own hundreds of bond types, across many different issuers, it diversifies its holdings and lessens the impact on the portfolio of any one bond defaulting.
Risk/reward: While bonds can fluctuate, a bond fund will remain relatively stable, though it may move in response to movements in the prevailing interest rate. Bonds are considered safe, relative to stocks, but not all issuers are the same. Government issuers, especially the federal government, are considered quite safe, while the riskiness of corporate issuers can range from slightly less to much more risky.
The return on a bond or bond fund is typically much less than it would be on a stock fund, perhaps 4 to 5 percent annually but less on government bonds. It’s also much less risky.
4. Dividend stocks
Where growth stocks are the sports cars of the stock world, dividend stocks are sedans – they can achieve solid returns but they’re unlikely to speed higher as fast as growth stocks.
A dividend stock is simply one that pays a dividend — a regular cash payout. Many stocks offer a dividend, but they’re more typically found among older, more mature companies that have a lesser need for their cash. Dividend stocks are popular among older investors because they produce a regular income, and the best stocks grow that dividend over time, so you can earn more than you would with the fixed payout of a bond. REITs are one popular form of dividend stock.
Risk/reward: While dividend stocks tend to be less volatile than growth stocks, don’t assume they won’t rise and fall significantly, especially if the stock market enters a rough period. However, a dividend-paying company is usually more mature and established than a growth company and so it’s generally considered safer. That said, if a dividend-paying company doesn’t earn enough to pay its dividend, it will cut the payout, and its stock may plummet as a result.
The big appeal of a dividend stock is the payout, and some of the top companies pay 2 or 3 percent annually, sometimes more. But importantly they can raise their payouts 8 or 10 percent per year for long periods of time, so you’ll get a pay raise, typically each year. The returns here can be high, but won’t usually be as great as with growth stocks. And if you’d prefer to go with a dividend stock fund so that you can own a diversified set of stocks, you’ll find plenty available.
5. Target-date funds
Target-date funds are a great option if you don’t want to manage a portfolio yourself. These funds become more conservative as you age, so that your portfolio is safer as you approach retirement, when you’ll need the money. These funds gradually shift your investments from more aggressive stocks to more conservative bonds as your target date nears.
Target-date funds are a popular choice in many workplace 401(k) plans, though you can buy them outside of those plans, too. You pick your retirement year and the fund does the rest.
Risk/reward: Target date funds will have many of the same risks as stock funds or bond funds, since it’s really just a combination of the two. If your target date is decades away, your fund will own a higher proportion of stocks, meaning it will be more volatile at first. As your target date nears, the fund will shift toward bonds, so it will fluctuate less but also earn less.
Since a target-date fund gradually moves toward more bonds over time, it will typically start to underperform the stock market by a growing amount. You’re sacrificing return for safety. And since bonds are yielding less and less these days, you have a higher risk of outliving your money.
To avoid this risk, some financial advisors recommend buying a target-date fund that’s five or 10 years after when you actually plan to retire so that you’ll have the extra growth from stocks.
6. Real estate
In many ways, real estate is the prototypical long-term investment. It takes a good bit of money to get started, the commissions are quite high, and the returns often come from holding an asset for a long time and rarely over just a few years. Still, real estate was Americans’ favorite long-term investment in 2021, according to one Bankrate study.
Real estate can be an attractive investment, in part because you can borrow the bank’s money for most of the investment and then pay it back over time. That’s especially popular as interest rates sit near attractive lows. For those who want to be their own boss, owning a property gives them that opportunity, and there are numerous tax laws that benefit owners of property especially.
That said, while real estate is often considered a passive investment, you may have to do quite a bit of active management if you’re renting the property.
Risk/reward: Any time you’re borrowing significant amounts of money, you’re putting extra stress on an investment turning out well. But even if you buy real estate with all cash, you’ll have a lot of money tied up in one asset, and that lack of diversification can create problems if something happens to the asset. And even if you don’t have a tenant for the property, you’ll need to keep paying the mortgage and other maintenance costs out of your own pocket.
While the risks can be high, the rewards can be quite high as well. If you’ve selected a good property and manage it well, you can earn many times your investment if you’re willing to hold the asset over time. And if you pay off the mortgage on a property, you can enjoy greater stability and cash flow, which makes rental property an attractive option for older investors. (Here are 10 tips for buying rental property.)
7. Small-cap stocks
Investors’ interest in small-cap stocks – the stocks of relatively small companies – can mainly be attributed to the fact that they have the potential to grow quickly or capitalize on an emerging market over time. In fact, retail giant Amazon began as a small-cap stock, and made investors who held on to the stock very rich indeed. Small-cap stocks are often also high-growth stocks, but not always.
Like high-growth stocks, small-cap stocks tend to be riskier. Small companies are just more risky in general, because they have fewer financial resources, less access to capital markets and less power in their markets (less brand recognition, for example). But well-run companies can do very well for investors, especially if they can continue growing and gaining scale.
Like growth stocks, investors will often pay a lot for the earnings of a small-cap stock, especially if it has the potential to grow or become a leading company someday. And this high price tag on a company means that small-cap stocks may fall quickly during a tough spot in the market.
If you’re going to buy individual companies, you must be able to analyze them, and that requires time and effort. So buying small companies is not for everyone. (You may also want to consider some of the best small-cap ETFs.)
Risk/reward: Small-cap companies can be quite volatile, and may fluctuate dramatically from year to year. On top of the price movement, the business is generally less established than a larger company and has fewer financial resources. So small-caps are considered to have more business risk than medium and large companies.
The reward for finding a successful small-cap stock is immense, and you could easily find 20 percent annual returns or more for decades if you’re able to buy a true hidden gem such as Amazon before anyone can really see how successful it might eventually become.
8. Robo-advisor portfolio
Robo-advisors are another great alternative if you don’t want to do much investing yourself and prefer to leave it all to an experienced professional. With a robo-advisor you’ll simply deposit money into the robo account, and it automatically invests it based on your goals, time horizon and risk tolerance. You’ll fill out some questionnaires when you start so the robo-advisor understands what you need from the service, and then it manages the whole process. The robo-advisor will select funds, typically low-cost ETFs, and build you a portfolio.
Your cost for the service? The management fee charged by the robo-advisor, often around 0.25 percent annually, plus the cost of any funds in the account. Investment funds charge by how much you have invested with them, but funds in robo accounts typically cost around 0.06 percent to 0.15 percent, or $6 to $15 per $10,000 invested.
With a robo-advisor you can set the account to be as aggressive or conservative as you want it to be. If you want all stocks all the time, you can go that route. If you want the account to be primarily in cash or a basic savings account, then two of the leading robo-advisors – Wealthfront and Betterment – offer that option as well.
But at their best a robo-advisor can build you a broadly diversified investment portfolio that can meet your long-term needs.
How the Pros Decide When to Buy, Sell, or Hold Stock
A broker often needs to make a snap decision to buy, sell, or hold a stock. There's no time to consult stock analysts, interview management, or read lengthy research reports. But a quick glance at some key information can lead to a good decision made under pressure. Say a company just released a press release about its quarterly report. Skip over the filler and look for some of these key facts.
- Look for growing sales and whether the growth suggests longevity versus the reflection of a one-time boon.
- Improving margins is usually a sign that a company is well-managed, but don't automatically dismiss a firm with deteriorating margins, as it could reflect that the company is launching a new product or expanding.
- Take a look at the quarterly and full-year guidance on future earnings and note how that guidance meets or misses Wall Street's expectations; then, scour the language for subtleties and implications.
- Consider whether a company's stock buyback program reflects management's confidence, or is essentially a PR move to impress investors and Wall Street.
- Consider companies that are developing products that look to capture the zeitgeist, or that are about to introduce products that are highly anticipated.
- Look at the stock chart for the last year and last five years, note seasonal variations and what the stock trend is, before making a potential move.
Check to see if the company is growing its sales and, if so, whether the sales growth is sustainable or related to a one-time event.
In addition to checking the sales numbers, you'll have to skim through the entire press release in order to see what management said about the quarter. The numbers plus the comments can tell you if the company experienced growth or just got a windfall.
In general, smaller companies, those in the $100 million to $1 billion sales range, should grow around 10% annually. Larger companies should be growing by at least 3% a year to be of interest.
Lastly, compare a company's growth in sales not only from last year but from the last quarter. If quarterly sales showed an upward trend, it's usually another good sign.
Tips For When To Buy, Sell Or Hold
Barring more in-depth research options, an investor can find out a great deal about a company's value and whether its stock is worth buying by reading press releases and quarterly profit reports.
A company's margins generally improve or deteriorate depending on how well it is managed. If the sales line is going up but costs are going up faster, something is going on.
It's not necessarily bad news. It could be that the company is entering a new business, launching a new product, or expanding its footprint. Amazon, for example, infuriated investors for years by investing heavily in warehouses coast-to-coast. That infrastructure spending finally started paying off.
On the other hand, it could mean that the company is just doing a poor job of managing its expenses. The management's discussion of the quarterly results can help assess the situation.
Many companies offer Wall Street some sort of guidance on future earnings, and it's nearly always important. How "the Street" reacts to the news is equally important.
That is, the company's guidance for the next quarter may be better or worse than Wall Street analysts are expecting. And those expectations will move the stock price up or down, at least short-term.
Delving a bit deeper into the psychology behind earnings guidance, if a company raises its guidance for the current quarter but downplays expectations beyond that, the stock will probably sell-off. If a company reduces its estimates for the current quarter but raises its full-year estimate then the stock will probably take off.
As a rule of thumb, keep your eye on the long term. Most of the time, Wall Street will overlook a short-term stumble if it is convinced that there is an upwards catalyst on the horizon.
Stock Buyback Programs
When a company uses its cash to buy back its own stock, it's usually a good sign that management believes the stock is undervalued. Repurchase programs will probably be mentioned in the company press release.
That said, management may have other motives. It may want to reduce the total share count in the public domain in order to improve financial ratios or boost earnings, thus making the company more attractive to the analyst community. It may be a public relations ploy to get investors to think the stock is worth more.
Share repurchase programs should be a sign that better times are ahead for the company.
In general, you want to see the total number of outstanding shares staying the same or falling, perhaps as a result of a repurchase program. That means future earnings are spread across fewer shares, making earnings per share higher. As shares outstanding increases, earnings are divided among a larger pool of investors and become diluted, decreasing your potential for profit.
It's virtually impossible to predict whether a new product will be a winner or not. But it's a big mistake to overlook the stocks of the companies that make them.
New products often garner the most attention from consumers and investors. This often helps move the share price higher in the near term. And the company has probably spent a huge amount of money on R&D and promotions as it positions itself to take in a whole lot of money.
Consider, for example, Apple's release of the iPod in 2001. Initially, some investors and analysts were skeptical that the company could deliver meaningful revenues from the device. As it turned out, that device propelled Apple's growth throughout the decade.
Of course, new products don't always turn out to be cash cows for the companies that produce them, but if you get in on a good one early, there's a dramatic potential for profit.
The Subtleties of Language
As you read the press release, consider your impression of what occurred in the quarter. Management might have talked up the company's many "opportunities" and relished its past growth. Or it might have outlined the many "challenges" facing the company. Management might identify potential catalysts for the business, such as new products or acquisition candidates.
In any case, that language can be as important as the earnings guidance numbers.
The language used in these press releases is very deliberate. It is reviewed by many eyes in the public relations and legal departments. An upbeat report is an especially good sign, while a report containing muted language should be viewed with suspicion.
Reports that are overly upbeat should be viewed with caution as well. If a company fails to deliver what it has previously promised or falls short of its future expectations, the stock is likely to be clobbered no matter what management says.
Finally, look at the stock chart for the last year and last five years.
Are there seasonal variations in the stock price? You may find it routinely trades higher or lower in certain seasons.
Determine the trend this stock is trading in: Is the stock trading above or below its 50-day and 200-day moving averages? Is it a thinly traded stock, or does it trade millions of shares per day? Has the volume recently increased or decreased? A decreasing volume could be a sign of less interest in the shares, which could cause a decline in the share price. Increases are generally favorable if the underlying fundamentals are solid, meaning the company has solid growth opportunities and is well-capitalized.
Taking a big picture, or 10,000-foot view of a company, allows you to consider the external factors that could keep the stock from thriving.
The 10,000-Foot View
Beyond the press release, consider the macro trends that might impact the stock. Rising interest rates, higher taxes, or consumer behavior may have an impact on the stock. Other external factors, such as an industry-wide downturn, might affect the company. These considerations can be as important as the fundamentals and technical indicators.
For example, consider Continental Airlines in 2006. The company was in fairly good shape, but higher fuel costs and a number of bankruptcies within the airline industry seemed to be holding the stock back. Continental expected to substantially grow its earnings over the next year, but the sector outlook seemed dismal. Continental merged with United Airlines in 2010.
The Bottom Line
By necessity, investors and their brokers often need to analyze companies on the fly and make snap decisions to buy, sell, or hold. Zeroing in on the key information helps them avoid a rash decision.
Of course, to trade or invest you would need a broker. If you don't already have one and are considering which broker to choose, do some research so that you can find a broker to fit your needs.
Hold stocks good buy and
Pros and Cons of a Passive Buy and Hold Strategy
There are essentially two ways to make money in the stock market: fast and risky or safe and steady.
While traders adhere to the former paradigm, most investors fall into the latter category. Armed with the mantra of “buy low, sell high,” these investors seek out undervalued stocks and buy them with the intent to hold on to these positions for months, if not years. To them, a company’s strong fundamental characteristics and sound management supersede all the chaos and flux that is inherent in the market, and in time, the stock will reward them with a large return on their capital.
After all, who wouldn’t want to own Apple Inc. (APPL) when it was trading at $6 per share or Netflix, Inc. (NFLX) at $17? If you are a prospective buy-and-hold investor, then read on to learn about the pros and cons of this popular and highly effective strategy.
- A buy and hold strategy is a long-term, passive strategy in which investors keep a relatively stable portfolio over time, regardless of short-term fluctuations.
- The success of buy and hold has been proven by historical data and is the preferred investing strategy of industry giants such as Warren Buffet.
- Buy and hold is also favorable for investors without a lot of time to spend researching the market.
- The biggest disadvantage of the buy and hold strategy is that it will tie up large amounts of capital.
- Like all investors, buy and holders should use diversification to sufficiently protect themselves from risk.
Let's take a look at the numerous advantages of using a buy and hold strategy.
Quite simply, the buy and hold strategy has been proven time and time again to return exponential gains on invested capital.
A list of the top buy-and-hold practitioners is a veritable who’s-who of the greatest investors of all time. Perhaps some of these names might ring a bell? Warren Buffett, Jack Bogle, John Templeton, Peter Lynch, and of course, Buffett's mentor and the father of value investing: Benjamin Graham.
OK, so maybe your stock-picking skills are not as refined as these industry titans. That’s alright. Simply place your money into an index tracker fund, such as the SPDR S&P 500 (SPY) exchange-traded fund (ETF), and forget about it for two to three years. The statistics are on your side. From 2010 to 2020, only 24% of actively managed funds outperformed passive funds and you don't have to shell out your hard-earned dollars on hefty management fees.
Is a stock chart as foreign to you as a different language? Do you hear the words “head and shoulders” and immediately think of shampoo? Can’t tell the difference between a simple moving average and the relative strength index (RSI)?
Your technical analysis may need some work, or you are just part of the large group of people that simply do not believe in the efficacy of the art. Academics and successful long-term investors alike have pounded the table for years, citing the fallacy of trying to “time” the market. And the stats would concur; studies have shown that markets are incredibly random (and wrought with anomalies).
As concluded by Nobel winner William Sharpe, in the landmark 1975 study, “Likely Gains From Market Timing,” a market-timer would have to be accurate at least 74% of the time to beat the index.
In other words, leave the head-scratching and hair-tearing to the traders. Much like buying a house, buy and holders look at the overall characteristics of the market, the asset, and the possibilities for future growth and just let the investment do its thing, without having to worry about trying to find the “perfect” entries and exits, or checking the price incessantly.
Supported by Facts
Buy and hold, and investing in general, is what is taught in academia and various portfolio management curriculums, because B&H is based almost entirely on fundamental analysis. Unlike its technical counterpart, fundamental analysis has very little room for guesswork.
The balance sheet, income statement, and statement of cash flows are all static and leave no room for subjectivity. Of course, forecasting growth, such as through a discounted cash flow model, has a large degree of subjectivity attached to it. However, comparing and analyzing companies through the ubiquitous price-to-earnings (P/E) or EBITDA multiples leaves nothing to the imagination, and are integral factors in finding good value stocks to hold for the long run.
Favorable Tax Treatment
Last but not least, buy and hold is great for long-term capital gains. Any investment that is held and sold for a period greater than a year is eligible to be taxed at a more favorable long-term rate, as opposed to a higher short-term rate.
Ties Up Capital
The biggest drawback of this strategy is the large opportunity cost attached to it. To buy and hold something means you are tied up in that asset for the long haul. Thus, a buy and holder must have the self-discipline to not chase after other investment opportunities during this holding period. This is exceptionally difficult to put into practice, especially if you have picked up a lagging stock.
Takes Time to See Growth
To add to the last point, buy and hold is also entirely time-intensive. Just because you have held the asset for 10 years, does not mean that you are entitled to a large reward for your time and capital invested.
Case in point: look at the differences in return between a sluggish utility stock and a fast-moving biotech company. However, bear in mind that the opportunity costs associated with a poor pick can be mitigated through diversification or simply buying and holding an index fund. However, for the former, the performance of a portfolio based around a few high fliers can be dragged down by the laggards.
Moreover, there is nothing stopping an investor from mistakenly picking and holding an entire portfolio of duds. For the latter point, index funds have also proven to not be immune to certain events, such as crashes.
Finally, just because a stock or an index fund has been held for many years, does not mean that it is infallible. While nothing short of the apocalypse will kill off the markets of developed economies completely, crashes do occur from time to time.
In the event of a correction, leading to a prolonged bear market, buy and hold portfolios can lose most if not all their gains. In these circumstances, investors might get overwhelmingly attached to their assets and simply average down in the hopes of a turnaround.
While solid, well-selected stocks can and have bounced back, there are stocks that go down for the count and wipe out a portfolio in the process.
Take the famous case of Enron. Enron was once seen as a darling of Wall Street, whose stock was valued at a high of around $90 per share in mid-2001. After its illegal accounting practices were discovered, by the time the company disbanded the stock fell all the way to $.60 a share.
Furthermore, an investor with significant exposure not just to a single stock but an entire industry that is wiped out due to technological advances or other reasons can shave their portfolio down to nothing without proper diversification.
Again, a buy and holder, just like any other investor or trader, must have a prudent risk management strategy in place or be willing to pull the plug before the losses piled on, which of course, is easier said than done.
The Bottom Line
Buy and hold remains one of the most popular and proven ways to invest in the stock market. The practitioners of this strategy often do not have to worry about timing the market or basing their decisions on subjective patterns and analysis. However, buy and hold has a large opportunity cost of time and money attached, and investors must act prudently to guard against market crashes and know to cut their losses/ take profits.
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