Current investing prospects are confused. Is the Fed done raising interest rates? Will we get a recession or a soft landing? Will the war in Ukraine continue to drag on the world economy as well as putting all at risk of a nuclear war? Is the sheer amount of US Treasuries that need to be purchased going to suck up necessary investment capital and send the market down. There is a way to stop worrying about all of this. Try choosing stocks for a ten year investment horizon. By choosing investments for the longer term you can expect to even out the yearly ups and downs of the economy and the market. Over the longer term the US stock is typically the best place to put your money.
Time Horizons for Investing
If you have money that you are going to need in a year or two from now you need to look at short term investments. If you are going to need that money in five to ten years you need to look at medium term investments. If you are investing for retirement or otherwise will not need that money for ten years or more you need to think about long term investments. In general, cash and cash equivalents are the best choice for the short term. In an article we wrote about how to invest without losing money we noted that interest-bearing investments like bank CDs, US Treasuries, and AAA corporate bonds are the safest. These are not the most profitable investments when you are looking out ten years or more.
Odds of Hitting a Homerun with a Growth Stock
We all wish that we had seen the promise in Microsoft when it first went public and bought the stock. In 1986 it opened at $21 and went to $35 by the end of the first day of trading. Accounting for stock splits, a share of MSFT stock today was worth $0.11 when it began trading and is worth $326.79 today. Thus the stock is 2,970.8 times as valuable today as it was initially. The problem with this sort of investment in a growth stock is that you typically do not know that Microsoft would outcompete its main competitors in its core market. These competitors back in the 1980s were IBM and Digital Research. IBM stock sells for about four times today what it sold for when Microsoft went public. Digital Research was a private company that was taken over by other companies and never again posed a threat to Microsoft and never made any money for its investors. Unfortunately, it is not all that easy to spot the promise of the next Microsoft when it starts out.
How to Predict Long Term Growth of an Investment
In 1988 Warren Buffett bought more than 14 million shares of Coca Cola. His company, Berkshire Hathaway, has continued to invest in Coca Cola over the years and now holds more than 400 million shares or 9% of the company’s stock. KO pays a 3.04% dividend and a share today is 22 times as valuable as when Buffett bought it in 1988. Buffett uses a concept called intrinsic stock value in his investing. The point is to assess how much money a company is likely to make in the coming years (or decades) and use that cash flow as a guide when buying, holding, or selling a stock. With this approach an investor never invests until they understand how a company makes money with its business plan. They invest when they expect the company to keep making money for Buffett’s favorite investment time horizon, which is forever. A company like Coca Cola has a dominant brand name and a huge array of products in addition to Coca Cola itself. It is not affected by changes in technology. And it has a 59-year dividend history with dividends always going up for decades. Coca Cola will never experience growth like Microsoft from 1986 to now. However, if it keeps on its 14-year upward trend, it will be worth $180 a share instead of $60 14 years hence and still be paying a 3% dividend. As part of your investing decisions, use dollar cost averaging to even out the ups and downs of the market.
Can You Make Money on the Hottest New Technology?
As a rule, technology that is brand new takes up to five years to turn into profitable products and services. Beyond five years or so a problem for tech investing is that a brand new technology that nobody has imagined may show up and sweep away currently profitable technologies like the VCR, floppy computer disks, or DVDs. That having been said, here are several technologies that may evolve and be profitable investments by ten years from now.
- Artificial intelligence and all of its applications
- Virtual Reality and all of its associated products and services
- Interfaces with the human brain for visual reality headsets
- Quantum computers and computing for commercial applications
- Three dimensional printing of human organs
- Artificial brain implants for restoring lost memories and functions
- First crewed mission to Mars and beginning of solar system colonization
- Beginning of a quantum internet that can’t be hacked by current methods
- Mapping of a significant portion of the human genome and the ability to understand and genetically cure diseases
- Development of accurate models of the human brain and cures for mental health problems
- Smart grid technology applied throughout the developed world
- Foldable electronics
- 3-D printable clothing
- Modular nuclear reactors
All of these technologies hold the possibility of another Microsoft. To get in on the long term profits you need to pay attention, determine who will make the best management decisions and manage their business most effectively. Who will develop a business and brand name like Coca Cola or Apple?
Choosing Stocks for a Ten Year Investment Horizon – SlideShare Version