Paul Samuelson – the first economist to win a Nobel Memorial Prize in economics – said: “Investing should be more like watching paint dry or watching grass grow.” He was right.
One of the most successful investment strategies is buy and hold investing. Whereby you buy a stock at a great price and hold onto it whilst it grows, receiving dividends in the process. However, there is one big problem with this strategy: patience.
Waiting for the right entry price and, conversely, for it to appreciate in value can take a long time. In my opinion, the best way to look at an investment is relative to its growth potential. For example, missing out on Apple Inc (NASDAQ: AAPL) when it was only $8 because you wanted it for $7.50 was a big mistake.
Now that doesn’t mean you go out and buy speculative micro-cap mining stocks at any price. Established growth businesses are sometimes worth paying up for because you’ll never get them for the price you’d like.
For example, Greencross Limited (ASX: GXL) is a stock I’d love to buy at a lower price but I know the chances of it dropping significantly in value over the coming months are slim. However, relative to its long-term growth potential, some investors might argue that it’s quite modestly priced.
Likewise, G8 Education Ltd (ASX: GEM) is pursuing a similar growth strategy to Greencross, and is seeking to consolidate the childcare market in Australia. Its track record is impeccable and likely to continue well into the future, but you’ll have to pay up if you want some shares. At 36 times earnings many ‘value’ investors might be put off.
As noted earlier, buy and hold investing is the best way to capitalise on a business model. Trade Me Group Ltd (ASX: TME) is New Zealand’s premier online auction place and recently listed on the ASX. It has an operating margin of 74%, net profit margin of 47% and strong balance sheets.
The last first-class growth story which investors can buy and hold for the long run is Cash Converters International Ltd (ASX: CCV). It has outstanding growth prospects internationally, including throughout the UK and New Zealand, and is a market leader here in Australia.
Too many investors focus on proven ‘blue-chip’ companies which have little room for growth, or try to find turnaround stocks in beaten-up industries. However, focusing on the long run is a sure way to profit from the few certainties in the stock market. It’s not exciting and there is no proven strategy to avoiding volatility, so stick with it and buckle down for the long run because the grass isn’t always greener on the other side.