The sharemarket is not a good place to go in search of short-term gains, no matter what anyone tells you.
It's like expecting to win at a casino…
You might get lucky. But chances are, over the course of the night, the house will finish marginally ahead (or better).
That's why the greatest investor in the world today, Warren Buffett, believes the only way to play your hand is to focus on the long-term: "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
According to GuruFocus.com, between 1965 and 2006, Buffett's Berkshire Hathaway increased its per-share book value at a compounded average annual rate of 21.4%. Clearly, paying a good price for shares in a great business and holding for the long term (five years or more) is the best way to get ahead of the pack. Buffett's track record proves how profitable it can be.
Determining a good price to pay for a quality business can be easy. The hard part is waiting for the stock to reach a level you're willing to pay.
For example, Macquarie Group Ltd (ASX: MQG) – Australia's largest investment bank – is currently trading in a range which doesn't make it a standout buy today. The bank has performed brilliantly over the past three years, as confidence has returned to global financial markets.
However given the nature of Macquarie's business a large proportion of its profits are cyclical and driven by fees, as noted in today's Australian Financial Review. Thus, long-term investors would be advised to wait for the cycle to reverse before committing to a purchase of Macquarie stock. My fair value estimate is around $46 per share but I'd like a price well below that before hitting the buy button.
On the opposite end of the spectrum is National Australia Bank Ltd (ASX: NAB), which has been a serial underperformer over the past 10 years. The group's foreign assets, particularly in the UK, have weighed significantly on group earnings. But that doesn't appear likely to change anytime soon.
However, over the long term, it's likely we'll witness the bank divest all of its US exposure and follow suit with its two UK banks also.
Until such time as the bank has removed itself from foreign markets, or a bargain price affords us an exception, NAB is best left on the watchlist. My fair value estimate for NAB shares is around $24, but a standout buying opportunity would come at a level well below that.
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At today's prices neither Macquarie nor NAB appear to be great investments. That's despite analysts forecasting strong earnings per share growth in the next year. However whilst I'm patiently waiting for a lower price, I am constantly on the lookout for other great stocks to buy right now…
