Does Long Term Investment Work?

First, let’s review the experience of the US stock market since 1929. The argument is that even if you never sold any of your stocks during the 1929 crash that you would have been ahead again after a few years. This “analysis” is done by following the Dow Jones Industrial Average over the years. It is true that the Dow uses an adjustment to allow for stock splits and dividends. But, the first ETF was only born in 1993 and they were not common until more than a decade later. Today you can put money in the SPDR Dow Jones Industrial Average and forget about it. But, that option was not available for decades after 1929. You would have needed to buy every stock in the DJIA at that time. And that approach would not have worked out very well!

Investing in Stocks in the 1929 Dow Jones Industrial Average

Because the recovery of the Dow Industrial Average is used as an argument for staying with the stock market through thick and thin, we looked at the stocks in the 1929 DJIA. As today, there were thirty stocks. Of those thirty, twelve survive today as the same company in the same business or, as in the case of Union Carbide Corporation, a part of a company in the same business, Dow Chemical. Here are the twelve.

Survivors from the 1929 DJIA

1. Atlantic Refining Company merged and became ARCO
2. Curtis-Wright Corporation continues under the same name
3. General Electric Company continues under the same name
4. General Foods Corporation is part of Kraft Foods
5. General Motors survived bankruptcy and continues in the same business
6. International Harvester Company downsized and continues as Navistar
7. National Cash Register Company continues as NCR
8. Sears Roebuck & Company is a shadow of its former self as Sears
9. Standard Oil of New Jersey is now ExxonMobil
10. Union Carbide is part of Dow Chemical
11. United States Steel Corporation remains as a shadow of its former self
12. Westinghouse Corporation continues its nuclear power business as Westinghouse Electric Company

Of the dozen that still resemble their former selves, US Steel and Sears have gone from being the first in the world in their businesses to being 26th place in the case of US Steel and ready to fall off the earth in the case of Sears. While General Electric still is a huge business with an impressive cash flow, their profits have been awful for nearly a decade and their stock price has suffered.

Non-survivors from the 1929 DJIA

The eighteen other companies were taken over by other companies, changed their business models so as to be unrecognizable as their former selves, went out of business, or were broken up by the SEC.

The point of all this is that in order to have benefitted from the recovery and forward growth of the DJIA, you would have had to buy and sell stocks so as keep matching the constituents of the Dow. A problem with that approach is that companies get kicked out of the DJIA after their performance gets bad and not beforehand. Thus, a better approach would have been to have learned how to calculate and use intrinsic stock value to guide your choices. But, then you would not have been tracking the DJIA!

Long Term Inflation

According to the CPI Inflation Calculator, to have the same purchasing power as $100 in 1929 you would need $1,499.38 today. In other words, your investments would need to have increased fifteen-fold after taxes to simply hold their purchasing power today. This would never have worked out with the majority of the stocks in the 1929 DJIA list.

Are Stocks for the Long Term a Problem?

Market Watch published an opinion piece questioning investment in stocks for the long term. They claim that there is a 30% chance of losing money by holding stocks for five years, a 20% chance of losing money over 20 years, and a 12% chance of losing money over 30 years. They looked at markets across the world and went back to the middle of the 19th century. Many unforeseen events like world wars played havoc with investments but they note that we are now going through the third “once in a lifetime” crisis in the last 20 years!

So, Why Are Some Investors So Successful?

But, if stocks are such a terrible idea, why is Warren Buffett so rich that he can give away about $7 billion a year and remain one of the three of four richest people on earth?

The key may be in Buffett’s comment that stock portfolio diversification is merely protection against ignorance. If you follow his recipe of only investing in companies whose business plan he understands and whose business plan is likely to keep making money over the long term, you could avoid quite a few of the losses in the 1929 DJIA group. Jim Cramer was quoted as saying that the average investor should keep his investments down to five or less as it is too much work to track more unless you invest full time.

It would seem that if you want to engage in short term or long term investing, you need to pay attention or you need to accept lower gains. Buffett, again, has said that a good approach for someone who does not have the time or interest to track stocks should buy shares of an ETF that tracks the S&P 500 (which tracks 500 stocks and not 30).

Picking Stocks to Invest in Long Term

To do this successfully, you need to understand and use fundamental analysis. And, you need to continue to use the same analysis to decide whether or not to stay invested in any given stock. Past performance and current cash flow are good guides to investing in stocks, but you still need to understand just why the company is making money and how that is going to continue into the distant future! Using the Dow Jones Industrial Average as a starting point by investing in an ETF that tracks this average can be a good starting point for long term investing.

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Qualities of the Ideal Stock Investment

The ideal stock investment is in a company that makes something that fulfills a basic need. The company should control its market sector through patents, aggressive research and development, continual new product development or by having such a high cost of entry business that competitors cannot make a dent in their profits. The company also needs to have a substantial margin of safety. This can be cash in the bank or unencumbered property. It should also include the fact that whatever the company makes will not soon be obsolete. Obviously a prosperous carriage maker at the end of the 19th century would have had to move into the auto market. And the company must not be so dominant in its sector that it is broken up by antitrust legislation such as happened with AT&T, the widow and orphan stock of much of the 20th century.

Making Things That People Need

The best investments in the coming years will be in things that make a difference. Drought is plaguing much of the world and causing civil strife. Cheap and efficient water purification systems could make huge differences in many parts of the world. One of the best stock investments today for profits tomorrow could well in a startup company that will provide clean and pure water where it currently does not exist. The internet is here to stay and the world is wired. A company like Cisco that virtually controls the world of routers will likely prosper into the indefinite future. And anyone who invents a cure for cancer will write their own ticket, so long as patents last.

Making Things That People Want

We wrote years ago about investing in beer. They were making beer in 9,500 BC. It will be around for at least that long again. This is a product that makes money and will not go away. Consumer products in general are safe long term investments. What one gives up in quick profits is made up in steady gains and dividends.

Doing It Right

Good management can make a huge difference between moderate profits and great profits. Where are the best stock investments today? Look for a well-run company. Look for a company that keeps its costs down and efficiently brings products to market. As always to your own homework and be satisfied with routine, steady profits.

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Norman Borlaug accepted work at an agricultural station in Mexico experimenting in different strains of wheat. At the time Mexico imported half of its wheat and after twenty years exported wheat. Borlaug is credited with developing breeding techniques in an number of plant varieties that ended up multiplying worldwide cereal production. The long term investment by the Rockefeller and Ford Foundations fostered the green revolution and feeding the world through the work or Norman Borlaug.

Today’s word of plant genetics is every so much more complicated with the ability to insert new genes into the genetic code of wheat, corn, soybeans, and rice. Developing more and better ways of feeding the world happens at field stations and in the lab at companies like Monsanto. Interestingly, many of the companies involved in the ongoing green revolution have not seen their stocks rise with the this year’s market recovery.

Farmers are short of cash and are not paying for more expensive, new varieties of seed. The economic crunch is also reducing the amount of pesticide and herbicide that many are using. Since many companies like Monsanto are in the seed business and in the business of controlling plant infestations their cash flow is down.

Nevertheless the world will find means to feed its hungry. Discoveries made today will result in the world producing new and more nutritious foods for less. Long term investment in the companies pursuing research in plant genetics, the ongoing green revolution, will pay over time.

The ongoing controversy about using genetically manipulated seeds will likely continue and will in all likelihood reduce stock prices of companies whose business is feeding the world. Thoughtful long term investment in companies with a strong research base in the green revolution will not only help in feeding the world but help in sending quarterly dividends to your mailbox for decades to come.

An old farmers’ saying is that “they aren’t making any more land.” This is true. However, new plant varieties that more drought resistant or resistant to salinity increase the land that can be planted. Long term investment in those making those seeds will pay dividends, virtually forever.

If you are thinking of very long term investment think of energy, clean water, and think of food. Think of the green revolution and feeding the world.

Is it possible to find long term investments that will remain stable investments and secure investments over generations? If so, what will these investments look like? What kind of return will they give and will they be subject to the ups and downs of temporary market conditions? Is it possible to successfully make very, very long term investments?

This subject came to mind the other day when this author walked down a street he had not visited for some time and noticed a clothing store. The sign above the door indicated that the store is a branch of a store that was founded in Seville, Spain in 1892. El Caballo started as a shop making tack (harnesses, etc.) for horses and branched out into clothing for riders. Today the store has 32 outlets in Spain alone and is a name in women’s fashion.

In the case of this company excellent management and attention to quality have been passed on generation by generation. However, is this company a good very long term investment, a secure investment?

Another case in point might be Hormel which started in 1891. Hormel pays a 2.5% dividend each year. The company is controlled by the Hormel Foundation whose sole purpose is to provide for the welfare of Austin, Minnesota where the company has its home plant. Because of the controlling interest of stock held by the foundation this company is pretty much immune to takeovers and is a yearly cash cow that processes meat in the American Corn Belt and sells its products all over the world. This stock is never going to go very high or very low and will keep paying dividends, probably forever. Perhaps this will be the very long term investment we are looking for. Hormel is certainly a stable investment and a secure investment if not a fast grower.

Seeing into the future for successful very long term investments is not easy. However, certain types of businesses tend to be immune to fluctuations in management, current trends, and takeovers. Companies with a family or foundation in control of the majority of stock such as Hormel, Campbell Foods, or Hershey also have strong brand names that have survived for more than a century. Stability of ownership of a strong brand name would seem to be an indicator for a good very long term investment. In addition, these companies make food, or, in the case of Hershey, candy. Very long term investment in something that people eat is probably a good idea. Food is a secure investment and with century long track records these companies are stable investments.

In the last century American Telephone and Telegraph was considered the best secure investment and very long term investment, the “widow and orphan stock.” However, AT&T was based upon a strangle hold on technology and a monopoly, with of which evaporated with a court ruling and competition.

Power plants come to mind as very long term investments and, in today’s world of looming scarcity, water purification plants.

Again, this is food for thought. There is an old story of a man who passed on his wealth as stock in a stable investment, a carriage factory and bridle shop specifying in his will that the stock could never be sold. It became worthless when Henry Ford started mass producing cars.