Too many people who invest in the stock market, do it at exactly the wrong time and in exactly the wrong way.
Or at least they think they do…
New investors come to the market only once it's done well, then head for the exits at the first sign of a correction or crash. Usually at a loss.
So it's only natural that passive investors with little or no interest in finance would want to invest in only the "safest" of companies.
Big blue chip stocks with solid dividend yields, competitive advantages and superior brands are at the top of investors' shopping lists. Unfortunately, the market already knows how good they are, so their share prices rarely fall into bargain territory.
Could these be the among the best lower risk stocks on the ASX?
Telstra Corporation Ltd (ASX: TLS), Woolworths Limited (ASX: WOW) and Transurban Group (ASX: TCL) are three companies which tick off nearly all the characteristics for a great defensive investment.
Telstra is known for its superior customer service, network coverage and large product offering. These traits allow Telstra to generate huge free cash flows and invest heavily in new products and services, further enhancing its competitive advantage each time.
There are few companies on the market which have higher operating margins than Telstra and fewer again which can upload them year after year.
One of the limited number of companies which can do it better than Telstra, is Transurban Group. It owns toll roads throughout Australia and North America. These provide huge recurring revenue streams and operating margins above 60% have not been uncommon throughout the past decade.
It's incredibly hard, nigh impossible, for new competitors to emerge because toll roads must be regularly maintained and upgraded, they are also regulated and purpose built.
But companies which appear to be monopolies aren't the only ones which can prove to be excellent defensive investments. For example, Woolworths offers non-discretionary items at low operating margins, yet produces excellent profits for shareholders.
Like the two aforementioned companies, its strong balance sheet and recurring revenue stream afford it a foundation for high levels of reinvestment in new growth areas. This is exemplified by its ongoing push into the Australian hardware market, where its Masters home improvement centres hold much growth potential, albeit over the long term.
What about dividends?
Telstra, Transurban and Woolies are forecast to pay dividends of 5.4%, 4.8% and 4.1%, respectively.
Buy, Hold, or Sell?
Often considered the father of value investing, Benjamin Graham famously said: "In the short run, the market is a voting machine but in the long run, it is a weighing machine."
By being able to identify great companies trading at good prices and maintaining their equanimity during the market's seemingly wild vicissitudes, some of Graham's students went on to produce truly spectacular returns from the share market.
Whilst the market is scrambling to get its hands on each of the above three companies, I believe none of them will deliver you market-beating returns from today's prices.
Patience is a long-term investor's greatest tool and allows us to capitalise on the market's best kept secret: Time. It's what separates the best investors like Warren Buffet (who was mentored by Benjamin Graham), from the average investor.
So keep these three companies on your watchlist, take your time and wait for the fat pitch to come along, then hit it out the park. Remember, patience doesn't lose you money.
