One of the best pieces of investing advice I ever read said that each investor, whether they managed billions of dollars of stock on behalf of clients, or had a $1,000 portfolio for fun, should keep a list of "locked drawer stocks".
These stocks were not stocks to hold forever. Rather, the stocks kept in the locked drawer represented the businesses that the investor would love to own, with the one catch being the current price was too much to pay.
The rationale is that when the price falls and the time comes to buy, most investors don't want to, often believing that the market is in possession of some wisdom that they don't have.
By keeping your ideal list of stocks in a locked drawer (or a file on the desktop of your computer) you can turn off the market and buy when the price falls into your buying range.
Locked drawer stocks are often also the most expensive ones on a range of valuation metrics. That's because they usually command a dominant number one position in their sector, and can reinvest endlessly to maintain or grow their distance over their competitors.
There are only a few such stocks listed on the ASX, but the three below are all on my locked drawer list.
REA Group Limited (ASX: REA) is an easy inclusion in the list of stocks that monster their rivals. Its nearest rival Domain, is a distant number two in the market, attracting less than half the real estate marketing revenue that REA does.
Research provided by REA confirms this, with internet browsers far less engaged with the Domain website than the realestate.com.au portal, which means that more time and attention, and consequently, more buyers and sellers, are found on REA's platform.
Interestingly, owning REA group also gives investors a fairly cheap way to participate in two huge growth markets for online property advertising. REA Group owns stakes in the south-east Asia focussed iProperty Group Ltd (ASX: IPP) and the US real estate listing company, Move Inc.
In both these markets, other "offline" methods of real estate advertising still dominate, placing them in the same place that Australia was around a decade ago. That gives REA Group a powerful tailwind to harness, as it is highly unlikely that print and old media will remain as dominant as they are today in those markets, as advertising, like everything else, moves online.
A lesser known stock with just as strong a competitive advantage in its home market is Trade Me Group Ltd (ASX: TME). For those familiar with the Australian local classifieds site, Gumtree, TradeMe is the Kiwi equivalent.
But in recent years, the company has been diversifying well beyond its general items marketplace, and become a place to sell real estate, cars, advertise jobs and find dates. That gives it the characteristics of some of the most successful online businesses.
According to the company, there are over 3.7 million active member accounts, with over 800,000 New Zealanders visiting the site daily. When compared to the Kiwi population of around 4.6 million people, you begin to understand how powerful TradeMe really is. In fact, it can lay claim to successfully defeating global behemoth eBay when it tried to enter New Zealand.
If it can continue to leverage this unrivalled audience to sell and cross-sell across the full product spectrum, it will be a very profitable business to hold for the long term.
Blackmores Limited (ASX: BKL) is one of the most remarkable stories to come out of the stock market this year. For years it bounced around the $30 per share mark, but this year, it has appreciated from $35 to over $155. That's not a typo, the purveyor of vitamins and health supplements has appreciated by over 340% in less than one calendar year, which is the kind of share price run that is usually attached to a speculative mining stock, not a long established business.
Despite stiff competition from well-funded upstarts like Swisse, Blackmores has retained its market position as number one in Australia. More importantly, it is a leader in China, with visitors to Australia from the People's Republic happy to pay a premium price and buy in bulk as well.
This kind of brand prestige is hard to achieve, but even harder to replicate. Blackmores has been voted the most trusted vitamin brand in Australia for seven consecutive years – something that no competitor can lay claim to.
Of the three stocks on this list, REA Group undoubtedly has the most blue sky potential with its overseas options, but I would be happy to own plenty of all three at the right price.
