• Alexion Pharmaceuticals (AXLN), Current price: $126, Target price: $141
• Bank of America (BAC), Current price: $24, Target price: $26
• Cisco Systems, Current price: $31, Target price: $39
• Citigroup, Current price: $67, Target price: $73
• Constellation Brands (STZ), Current price: $197, Target price: $218
• HP Inc. (HPQ), Current price: $18, Target price: $23
• Jack in the Box Inc. (JACK), Current price: $96, Target price: $126
• Johnson Controls (JCI), Current price: $44, Target price: $51
• Schlumberger (SLB), Current price: $67, Target price: $90
• T-Mobile (TMUS), Current price: $61, Target price: $72
• Viacom (VIAB), Current price: $35, Target price: $48
• DXC Technology (DXC), Current price: $78, Target price: $85

Read the article for the rest of list. Last year’s list came in with an 11.38% return which was one percent less than the S&P 500. The point is to pick solid investments which follow Buffett’s rules of investing one and two, both of which are not to lose money. How can you pick stocks that are likely to at least hold their value and more likely appreciate with perhaps a dividend thrown in? Pick stocks where you know how the company makes money and will continue to do so into the longer term future. And learn to do the intrinsic stock value calculation to pick stocks to buy, hold or sell.

Does It Have a Viable Business Plan?

When a new technology emerges it can cause spectacular profits. And when the next technology comes along the first can be relegated to the dust bin of history. A famous example of a business plan that died due to changes in technology is Eastman Kodak. They invented the personal camera and were the king of film until digital came along and demolished their business plan. Understanding how a company makes money and how it will continue to do so is critical to knowing what investments you want to own next year and beyond.

Intrinsic Value

To know what investments you want to own next year you need to pick companies where you have a clear idea about their future cash flow. Then you can calculate intrinsic stock value. The end goal is to determine the relative Graham value which is the intrinsic value divided by the current stock price. When the value is greater than one the stock will likely hold its value or go up in price. Thus it is a buy or hold. If the opposite is the case this is not stock that you want to be owning next year.

What Investments Do You Want to Own Next Year? DOC

What Investments Do You Want to Own Next Year? PDF

What Investments Do You Want to Own Next Year? PPT

However, when it comes to managing Berkshire Hathaway’s $153 billion stock portfolio, Buffett and his top money managers aren’t afraid to reverse on a dime and liquidate a stock, should the company cease to meet Buffett’s four investment criteria.

And these are his four criteria for buying and holding a stock.

We select investments on a long-term basis, weighing the same factors as would be involved in the purchase of 100% of an operating business:

(1) favorable long-term economic characteristics
(2) competent and honest management
(3) purchase price attractive when measured against the yardstick of value to a private owner
(4) an industry with which we are familiar and whose long-term business characteristics we feel competent to judge.

The eleven stocks that Berkshire Hathaway purchased with an eye toward holding forever and then sold are these.

Deere
Verizon
Kinder Morgan
Walmart
Intel
Conoco Philips
Exxon Mobil
Bank of America
Nike
Home Depot
Lowe’s

In more than one case Buffet’s decision to purchase was more successful than his decision to sell as stocks like Home Depot, Lowe’s, Walmart and Intel which all rallied after Berkshire Hathaway dumped them.

When Is a Stock No Longer a Good Long Term Investment?

Buffett’s criteria for picking stocks are his criteria for selling. The vast majority of investors would do well to follow his criteria.

Do You Understand the Industry?

We have mentioned before how Kodak had a great business model and then it didn’t in our article, Can You Hold an Investment for Too Long?

Eastman Kodak was founded in 1888 and prospered for decades as the inventor of the personal camera and maker of film. Although Kodak had a chemical division its success was based on the fact that in order to have a photograph of something you needed film. Then the digital era arrived and the Kodak business model was outdated. A stock that grew in value year after year and provided dividends year after year filed for bankruptcy protection in 2012.

This issue with Kodak was that the industry changed and Kodak could not change its business model and succeed.

Attractive Purchase Price to a Private Owner

In this case think as though you were going to purchase the entire company and run it forever. Does the price make sense? This is the intrinsic value approach.

Competent and Honest Management

In this case think as though you be buying a company and putting people you trust in charge. Are the current managers the ones you would pick? Although Buffett still holds Wells Fargo stock he has been openly critical of their management for not picking up on the account scandal and immediately stepping in to fix it.

Favorable Long Term Economic Characteristics

Here we are back to the factor you would consider in determining intrinsic stock value but then you take that evaluation out for well past a decade. Here is where Buffett’s comment about why he has generally avoided tech stocks comes in. He does not know what people will pay for a computer in ten years but has a pretty good idea what they will pay for a coca cola or a snickers bar.

The point is that investments are good forever until they are suddenly not and that is because they fail to stand up to one of more of your initial criteria for buying them.

Investments That Are Good Forever Until They Are Not DOC

Investments That Are Good Forever Until They Are Not PDF

Investments That Are Good Forever Until They Are Not PPT

There are certain truths that are etched into the brains of investors. They know that in the long-run, their portfolio returns will be close to the historic average of the stock market. In the short-run, they know that returns will fluctuate wildly. However, many investors have an unrealistic idea of when the short-run ends and the long-run begins. My clients are often stunned when I tell them that in the stock market, five years is a short-term time horizon.

From Feb. 1, 1988 to Jan. 31, 2017, the S&P 500 generated an average five-year compound rate of return of 9.83%. However, during the worst five-year period from March 1, 2004 to Feb. 28, 2009, the S&P 500 compounded at a rate of minus 6.63%. At the other extreme, the S&P 500 compounded at 28.56% from Jan. 1, 1995 to Dec. 31, 1999, according to S&P Dow Jones Indices.

Unfortunately, this wide-dispersion of returns causes investors to make big mistakes regarding their investment strategy or their investment professionals.

So, you need to stay in the market for longer than 5 years and perhaps even longer than 10 years to see the benefits of long term investing. But, what stocks do you buy. And when should you sell before waiting 5 or 10 years or longer?

How Does a Company Make Money?

For decades Eastman Kodak had a fantastic business model making film for cameras. Then digital came along and Kodak’s business model did not work anymore. On the other hand people still drink Coca Cola, eat M&Ms and use laundry soap. An investor could do a lot worse than follow Buffett’s thinking and pick stocks of companies that have been selling everyday items for years and will likely continue to do so for decades to come. Is there a good guide for when to buy and when to sell even though we are thinking in terms of a decade or more?

Intrinsic Stock Value

What is a stock selling for and what is it really worth? Many say that the market today is overvalued. That means that at current prices you are buying stocks that may well correct downward in the near future. A useful concept is intrinsic stock value.

In the aftermath of the stock market crash of 1929 in the early days of the Great Depression Benjamin Graham introduced the concept of value investing. No longer would those buying and selling stocks need to act like they were at the casino. With the concepts of intrinsic value and margin of safety Graham taught investors a rational means of investing in stocks.

The dictionary definition of intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value.

Calculating intrinsic stock value takes into account the long term. If you see a Kodak-like situation emerging with a stock you will likely see that its intrinsic value is substantially below its market value. That is a stock to sell. Likewise if a company shows long term promise its intrinsic value may well exceed its market value and it is a stock to buy and hold. Then, to take advantage of the market you need to hold the stock for a decade or more in order to see the long term benefits of buy and hold investing.

Just How Many Years Are Required to Make an Investment Long Term? DOC

Just How Many Years Are Required to Make an Investment Long Term? PDF

Just How Many Years Are Required to Make an Investment Long Term? PPT

In what truly is one of the most amazing statistics to ever come across our desks here at 24/7 Wall St., we recently saw a chart that showed that just 14 stocks have created 20% of all stock market gains in dollars since 1924. That is a phenomenal figure, considering the sheer number of companies that have come and gone in that time, and the overall wealth created in the stock market in the past 93 years.

The chart, which was sourced from Bloomberg/Henrik Bessembinder through a Jefferies research piece, contains many companies that have been around for years, but also sports four tech companies, albeit one has been around since 1911.

Here is the list starting with the ones that created the most stock market wealth.

1. Exxon
2. Apple Inc.
3. General Electric Co.
4. Microsoft Corp.
5. International Business Machines Corp.
6. Altria Inc.
7. General Motors Co.
8. Johnson & Johnson
9. Wal-Mart Stores Inc.
10. Proctor & Gamble Co.
11. Chevron Inc.
12. Coca-Cola Co.
13. AT&T Inc.
14. Amazon.com Inc.

Are all of these companies relevant today? If so, are they good investment? Here are the stock prices and notes regarding the last ten years for the first half of the list.

Exxon sells today for $83 a share and in the last ten years has come up from $75 with a high of $102 and a low of $57. Its current dividend is 3.6% a year.

Apple trades at $130 a share today and pays a 1.75% dividend. Ten years ago a current share traded for $12 and the course of the stock has been generally upward for the decade.

General Electric trades for $29 a share and provides a 3.24% dividend. Ten years ago a share sold for $36 and in 2009 in the depths of the recession you could buy a share for $7. The course of the stock has been steadily upward for the last 8 years.

Microsoft sells for $63 a share and provides a 2.46% dividend. Ten years ago it sold for $29 and during the recession fell to $15 a share. It has grown steadily since then.

IBM sells for $175 a share and pays a 3.2% dividend. Ten years ago it sold for $97 a share and dipped to $74 a share in the recession and peaked in the $214 range over 2012 to 2013.

Altria sells for $71 a share with a 3.41% dividend. Ten years back the stock rode a five year peak up to $85 a share and fell abruptly to $20 in 2007. It has recovered steadily since then.

General Motors sells today for $36 a share and pays a 4.175 dividend. The old GM was the one responsible for all that growth and it went bankrupt during the Great Recession. The new post-bankruptcy company has been around since the beginning of 2011 and has traded between a 2012 low of $19 and a 2013 high of $49.

If you are interested in long term investing and want the stocks that made the most money over the long term look at the details as well. AT&T is not the phone company that connected America. Altria is no long the money machine that was Phillip Morris. IBM missed the boat on personal computers and is no longer the dominant force that it once was. Nevertheless this is a good list to start from for choosing long term cash cows to fund your retirement.

What Stocks Made the Most Money over the Long Term? DOC

What Stocks Made the Most Money over the Long Term? PDF

What Stocks Made the Most Money over the Long Term? PPT

The laws of physics do not apply in the stock market. There’s no gravitational force to pull stocks back to even. Over 20 years ago, Berkshire Hathaway’s stock price went from $7,455 to $17,250 per share in a little more than five years. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $170,000 per share over the years.

We’re not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won’t keep on going up.

How profitable is stock investing?

If you had purchased 100 shares of Microsoft at $21 a share in 1986 when it went public your $2,100 investment would have turned into 28,800 shares after stock splits, be worth three quarters of a million dollars and be paying $41,472 in dividends each year.

If you had bought one “A” share of Berkshire Hathaway in 1990 it would have cost you $7,100. Today it would be worth $224,000.

There are other examples of investment “home runs.” In general strong, well postioned and well managed companies continue to make money and grow year after year. However, there comes a time when their market is saturated and profits plateau. That is why getting into these stocks when they are new and cheap or are cheap due to temporary economic factors is a good way to see the best profits. This is the world intrinsic stock value.

In the aftermath of the stock market crash of 1929 in the early days of the Great Depression Benjamin Graham introduced the concept of value investing. No longer would those buying and selling stocks need to act like they were at the casino. With the concepts of intrinsic value and margin of safety Graham taught investors a rational means of investing in stocks.

Read the article for the formula. The point is that you can find and purchase stocks that are selling below their value to you as an investor. These stocks will make money over the years. Their stock prices will rise as the market catches on. And many will be or become dividend stocks that provide you with a nice quarterly cash payment.

How Profitable Is Stock Investing? PPT

A Million Dollars Trading One Stock

Our sister site, ProfitableTradingTips.com published an article 5 years ago, How to Make a Million Dollars Trading One Stock.

How to make a million dollars trading one stock! This is a great idea if you can do it. Evaluating how this could be done is a good exercise in various methods of trading. How to make a million dollars trading one stock could be relatively easy if one had one hundred million to invest and only needed to make a little over one percent return on investment with your trade in order to keep the million dollars after fees and commissions. For most of us in the real world how to make a million dollars trading one stock will have to start with a substantially smaller investment pool, stocks with significant room for appreciation, and finding ways to leverage our investment. Many learn how to trade penny stocks with this sort of goal in mind.

For most investors in the real world making a million dollars on a single stock requires huge growth for the buy and hold investor or huge and repeated volatile price swings for the short term swing trader/investor. A single stock that comes to mind is Microsoft. If you had purchased 100 shares of Microsoft at $21 a share when the company went public you would have 28,000 shares today worth just under $1,500,000 today. And you would be collecting more than $40,000 in dividends every quarter. You can make a huge amount of money by picking the next Microsoft.

Smart Investing Over Time in Many Stocks

Although the founder of Microsoft, Bill Gates, is the richest man in the world the third richest is Warren Buffett. Buffet turned a textile business into a stock holding company in the 1960’s and turned it into an investing powerhouse. If you had purchased B shares in 1996 you would have seen a seven fold increase in your investment but if you had purchased A shares for $1,000 in 1964 your investment would be worth about $10 million today. Buffet practices buy and hold investing using intrinsic stock value as a guide. He has had many more winners than losers and is considered the most successful investor in the world.

Is There a Short Route to Profits?

Peter Lynch, the legendary manager of Magellan Fund, tells a story about a delivery man who noticed that one of the companies he delivered to was adding on to their plant. He asked why and was told that they had received a new set of orders and were hugely expanding their business. The delivery man bought the company’s stock for a few dollars a share and was pleased when it went up a thousand fold once Wall Street caught on.

The Common Thread

Buffet has said that he never invests in a company unless he understands what they do to make money and how that approach will continue to make money into the future. And he never buys at inflated prices. This is basic value investing. Whether it is picking the next Microsoft, riding along with a Warren Buffett or spotting a clear opportunity and taking advantage you can make money investing in the stock market. How much depends on your paying attention, spotting opportunities and taking advantage in a timely fashion.

How Much Money Can You Make Investing in the Stock Market? PPT

Apple versus a Biotech Startup

Apple, APPL, is one of the most valuable companies in the world measured in market capitalization. It makes a lot of money selling high tech hand held devices as well as desktop and laptop computers. If you believe that Apple will continue to make great products and be the leader in its field then you believe that the company will continue to make money. If your choice of stock market investment strategies is to look for and invest in long term growth you may simply want to keep buying Apple. An alternative for long term investing is to try to get in on the bottom floor before the stock price elevator starts to go up. If you invest in the company that invents a drug that cures diabetes, Alzheimer’s disease or a variety of cancers, you would certainly want to buy that stock in its early stages and then hold on to it forever. However, the fundamental analysis for Apple and our hypothetical biotech startup are decidedly different. Although Apple keeps inventing new things and improving its products it is a known entity and you can reliably use past performance as a guide in predicting the future. Our hypothetical startup is brand new, untested and dealing in technical world that few understand. In short you probably need to do a lot more research in order to cash in on a winner in the world of biotech startups than you would for a known quantity like Apple. The amount of work and the degree of risk involved in successfully picking and profiting from startups makes this one of our stock market investment strategies look like gambling to many investors if they do not do their homework.

Short Term Investments

Our hypothetical biotech startup might be a better choice for the short term investor. Any potential medication must go through a series of trials required up by the Food and Drug Administration. These steps are there to assure that a drug is not harmful and that it truly does what is claimed to do. At each hurdle stock prices can fluctuate wildly. If the drug passes the specific hurdle the stock price will jump up and if it does not the stock price will fall. In this case a short term investor will often buy on the promise of success and sell on the news. Because, when a drug passes its hurdle the company stock price commonly overshoots and then corrects. Smart short term investors look for bargains in promising stocks and cash out when they can get a quick profit. They may well return to the same stock as the next FDA trial approaches hoping to repeat the process at each phase. The same approach applies to investing in turnarounds. Short term investors get in when a stock is cheap and out as soon as the price rises in response to a buyout bid or other factors.

Stock Market Investment Strategies DOC

Stock Market Investment Strategies PDF

Stock Market Investment Strategies PPT

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Interest Rates and Stock Prices

We recently wrote about possible stock picks for 2014. Because interest rates are likely to rise this year we noted that utility stocks are likely to fall in price. At the same time their dividends will likely remain the same. So we suggested that one might consider buying utilities such as the Southern Company after rates go up. If you believe that the Federal Reserve will continue to pare back its quantitative easing stimulus program, when to sell stocks such as utilities is probably right now. As the economy slowly improves rates will go up and high paying dividend stocks like utilities will go down in value. These are great stocks for the long term but not on the eve of a rate hike. When to sell stocks like these, is when times are good and rates are low. When to buy stocks like these is when rates go up, their prices go down, and the value of their dividends rises significantly.

Overbought Markets and Stocks

There are times, perhaps even now, what an individual stock or the entire market has been going up for months or even years. New investors enter the market with the perception that any stock they buy will go up in price. However, there are sectors such as gold investments that have recently gone bad. It should have been obvious to smart investors that gold would not go up forever. New investors believed the hype that currencies would fail and that gold would be king. The market was overbought and when interest rates started to go up and the economy started to mend and when the US dollar rose, gold took a nose dive and fell more than fifty percent. When to sell stocks is when the entire world is buying them and driving prices up beyond where fundamental dictate. When considering when to buy stocks look at profit to earnings ratios, intrinsic stock value, margin of safety, and technical analysis of market sentiment. When to sell stocks is when these fundamentals are bad and the market is ignoring them.

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