When we talk about long-term investing what do we really mean? 5, 10 or 20 years? How about 50?
Fun fact: $20,000 invested at 12% per annum (the Australian stock market’s historical average return) turns into $5.78 million in 50 years.
Of course, many/most investors don’t have the luxury of being able to invest for half a century. However the idea can be useful as a hypothetical or “what if” scenario for those on the lookout for 10 or 20-year investments.
So what should you look for when determining a 50-year investment?
Would you choose a company which has a stock price that appears undervalued, but may face a number of structural headwinds in the near future (i.e. an OK company at a great price)?
Or would you choose to pay a higher price for a great quality company, even if it meant it had an increased chance of falling in price in the short or medium terms (i.e. a great company at an OK price)?
Given the choice, I’d definitely take the second option.
As the greatest living investor, Warren Buffett says: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
He has a number of excellent quotes but perhaps none more fitting in this article than: “The best holding period is forever.”
So what S&P/ASX200 Index (INDEXASX: XJO) stocks should a 50-year investor buy today?
Here’s four I think will still be around (and much more profitable) in 50 years…
- BHP Billiton Limited (ASX: BHP) is a company very likely to be around in 50 years. The timeless need for natural resources and BHP’s extremely successful history (which goes back over 150 years) reassures me of this.
- Rio Tinto Limited (ASX: RIO) is another miner which has an operating history of more than 100 years. Rio has some mines, such as Weipa in Queensland, which have been in production for over 50 years and will go on for at least another four decades! Like BHP it’ll pay dividends for many years to come.
- Australia and New Zealand Banking Group (ASX: ANZ) is another stock I’d gladly buy with a 50-year investment horizon. Although I wouldn’t call it a bargain at today’s prices, ANZ is positioning itself in Asia for long-term outperformance of its domestically focused peers. Given its dividend yield (grossed-up) is enough to return 100% of its current share price in under 10 years, the chance of more than doubling your money in 50 years is pretty good.
- Macquarie Group Ltd (ASX: MQG) must, like ANZ, adapt to the disruptive nature of technology to remain competitive in the banking industry in the ultra-long term. However our biggest investment bank has exposure to a number of very lucrative markets and specialises in many niche finance and banking areas where it’ll be able to leverage growth for many years into the future.
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Of the four companies, I think Rio Tinto and BHP Billiton are the best buys at today’s prices. However for Macquarie and ANZ I am, like Buffett, building up a cash balance until I get a better price to buy in. I suggest readers do the same because at the moment I think neither of them are trading at fair prices.