It's about time in the market, not timing the market that's important. Too many of us try to create overnight fortunes by making investments at exactly the right price and time, in a market which is anything but timely and accurate.
Being generally right is much better than being precisely wrong, although it's probably not easier. That's why you'll never hear a Fool (upper case 'f') say something like, "you should enter Commonwealth Bank shares at $75.40 and sell at $76.32". In that sentence, there's too much improbable precision for anyone who is a true long-term investor.
Instead a long-term investor will say, "I believe this company is likely to grow earnings at a healthy rate and I'm prepared to pay the current price." Sounds a lot easier and trouble-free to me.
Let's take a general look at three well-known stocks and see what their long-term prospects boast and whether they're ripe for the picking.
Rio Tinto Limited (ASX: RIO) is a name many investors would be familiar with but, perhaps contrary to what some traders might believe, it's not just a share price attached to three letters. It'll soon be the world's biggest producer of iron ore, a key ingredient in steel. It also produces copper, aluminium, coal and much more through five business divisions. In recent times, its share price has come under pressure following massive write-downs after very, very poor investment decisions.
One such investment was the purchase of its aluminium business, Alcan for $US38 billion, when aluminium prices were at an 18-year high. It now contributes around 5% of earnings to a company currently valued at $27 billion. Despite this, it appears the majority of write-downs are behind it and management can now get on with increasing iron ore production. At current prices, investors will have be content with iron ore remaining the group's major revenue and earnings driver. If the spot price of iron ore stays above $110 in the medium term, it wouldn't be surprising to see Rio trading back above $80 per share.
NIB Holdings Limited (ASX: NHF) is about as far away from commodities as a company can be. Its insurance division has been continually ticking over record profits and driving increases in dividends. It's the ideal long-term investment. It recently announced the rollout of its NIB Options cosmetic surgery and dental service which presents exciting possibilities for the company. It's not another insurance product, but offers Australian consumers the ability to receive treatment from reputable specialists in both Australia and overseas. Something which Australians have acknowledged is done much cheaper, particularly in Asian countries.
NIB's valuation is still well-priced despite rising 30% in the past year. Its earnings are expected to jump by around 23% in FY14 as a result of annual increases to health insurance premiums and growing market share. At current prices, I believe the company presents a compelling long-term investment.
Lastly, Slater & Gordon Limited (ASX: SGH) is one company going from strength to strength. It has recently started its venture in the UK market – which is five times bigger than ours – and continues to offer more services to its Australian clients. Such as personal legal services.
Like NIB it trades on earnings multiples in the high teens but is deserving of its price tag. With continued expansion in the UK and ongoing dominance in personal injury cases here in Australia, both earnings and dividends are likely to grow in the long-term.
Foolish takeaway
With NIB and Slater & Gordon it might actually be easier to be generally correct than precisely wrong because their business models are straightforward, they have competent management and robust balance sheets and a clear strategy for increasing shareholder returns. Although they trade on high multiples with share prices which have grown well in the past couple of years, it's their future not past which is important to us.
Rio Tinto is one stock I'm not 100% convinced will outperform the market in the long-term, although it would present a compelling undervaluation for bullish resources investors.
For each of these companies, their share prices will rise and fall like waves in the ocean, when news does, or doesn't emerge, and earnings results are released. It's vital we focus on the horizon and make sure we don't get swept overboard by all the 'noise' which affects financial markets and lose sight of our goals by trying to time our investments.
