If you have spent some time reading articles on www.fool.com.au, you will have encountered The Motley Fool's investment philosophy (more information can be found here). It is deceptively simple and has been proven to produce market-thumping returns time and time again:
- Buy high quality businesses at a fair price, with exceptional management teams
- Hold these businesses over the long term
- Only sell if your investment thesis changes, you have a better investment opportunity, or the stock is significantly overpriced
When investing with a time frame of years, not months, the management team has the opportunity to deliver earnings growth via continual business improvement. Over this extended period, shareholder returns should closely follow the business performance and reward long-term investors.
Berkshire Hathaway, led by the exceptional chairman and CEO Warren Buffett, is a shining example of this strategy. Over the past 50 years, Berkshire Hathaway has increased its book value per share at a compound growth rate of 19.4% compared to its benchmark S&P 500 return of 9.9%.
By doing nothing more than holding an equally weighted portfolio of Commonwealth Bank of Australia (ASX: CBA), CSL Limited (ASX: CSL), Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW), you could have achieved returns that substantially beat an index-linked fund over the period and avoided the fees in the process.
Motley Fool Share Advisor service is another example of this investment strategy outperforming the market. Since inception in December 2011, the average ASX stock selection within the Share Advisor service has returned over 65% compared to the All Ords return of 25%.
The correlation between long-term holding periods and the market-thumping returns achieved at Motley Fool Share Advisor service is highlighted in the chart below.
The key points from this chart are:
- 6 out of 14 (43%) companies provided a negative return after holding them for less than 1 year. This reduced to 4 companies (30%) for a holding period between 1 to 2 years and only 2 companies (15%) provided a negative return for a holding period over 2 years.
- Only 1 company (7%) provided a return over 100% after holding it for less than 1 year. This increased to 3 (23%) companies for a holding period between 1 to 2 years and an astonishing 8 (77%) companies returned over 100% when the holding period was longer than 2 years.
- Share Advisor as a service is still in its early days, with the average recommendation being only 18 months old. Therefore while performance has been strong so far it cannot be judged over the long term yet.
Also, it shouldn't be expected that such a high proportion of stocks can return more than 100% in such a short time, the trend in the data is obvious: holding investments over a longer period greatly increases your chances of achieving superior returns.
Some of the stocks that have already returned over 100% will continue to grow and may post returns of 200%, 300% and possibly even 1,000%, more than making up for the poor performers within your portfolio. Except for a few lucky picks, these massive "multibagger" returns come from long-term holding. But to reinforce a critical part of the strategy, these investments must be in high-quality businesses with excellent management.
