The stock market has had a good run and the real estate market has largely recovered from the damage of the Great Recession. But the stock market is flirting with a correction and who knows how long real estate prices will stay up. What are the most profitable investment today and going forward? Our focus here is long term appreciation of your net assets and not on a short term uptick in stock prices. Last year we looked at value investing in our article How many Years Are Required to Make an Investment Long Term?
People like Warren Buffett have made substantial profits from smart long term investing. Just how many years are required to make an investment long term? We can get a hint from the so-called Oracle of Omaha who says that he cannot outguess the market in the short term but has a pretty good idea of what will sell well ten years hence. Thus we should not be surprised that the long run for investing is longer than you think.
The general consensus is that you need to stay in an investment at least five years and probably ten to see the benefits of long term investing. The S&P 500 peaked at 1509 in November of 2007 and bottomed out at 683 in March of 2009. Ideally you would have purchased shares in an ETF that tracks the S&P 500 and done so in March of 2009. But a long term investor would have purchased in 2007 as well. Today the S&P 500 is at 2600 after peaking above 2800 in January of this year. Successful market timing can help but it is difficult to carry off time and time again. The point is that if you had bought the S&P 500 at its high point before the crash and held on you would be up around 80% today. If you had added to your portfolio as the market went down in 2007 and 2008 you would have done even better.
Buying into the US economy can be beneficial over the years as our S&P 500 example shows. But what if you had purchased Apple (AAPL) at its high just before the crash? Apple sold for $28.55 a share in December of 2007 and fell to $12.88 by January. And it is selling for $172 today. Obviously, picking a successful company like Apple worked out better than diversifying across the US economy with an S&P 500 index fund. But with Apple just like the S&P 500 you could have bought at the high point before the crash and still have gained after the recovery. The key is the concept we often mention, intrinsic stock value. How does the company make its money and how will that work out in years to come?
When the Game Plan No Longer Works
Eastman Kodak was founded in 1888 and George Eastman was responsible for introducing the camera into everyday life. A business plan based on making film for cameras, chemicals for developing that film and paper for printing finished photos was a money maker for Kodak for decades. In 1976 Kodak stock sold for $106 a share. By 1991 it was down to $41 a share. Stock buybacks and divestitures kept the company alive for another 22 years as the share price dwindled and then Kodak filed for bankruptcy protection in 2013.
The death of Kodak’s business model was the digital camera. Today one sees some of the same in General Electric which has been at the pinnacle of American engineering excellence for decades but not returning value to its shareholders.
The most profitable investments are those that both track the strength of the American economy and profit from new and profitable ideas, like the smart phone in the case of Apple. Looking to the future niches like gene editing show promise for long term and increasing profits so long as you either pick the eventual winners or invest in a fund that tracks a basket of these stocks.