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Stocks for the Long Run by Jeremy Siegel, first published in 1994, is broadly considered one of the best investment books of all time. As the title implies, the idea is that in the long term, stocks win for compounding wealth. That has certainly broadly been the case, but even Siegel admits that there are limits to the idea.

After such a long economic expansion since 2009, and after the stock market has moved up so much, where should we invest for the long run? Is it safe to invest now, sleep for 10 years, and pocket the profits?

When looking over such a long span, factors like earnings and valuations matter. That’s why long-term forecasting tends to focus on such factors. Unfortunately, those long-term forecasts don’t look very positive right now (and thanks to Stephen Jones, a NYC-based financial and economic analyst, for the data). While the stock market historically returns a 6% real (net of inflation) return over time, the fundamental forecasts for the next 10 years or so are lower. Schiller’s P/E10 (which considers the last 10 years of earnings) is the most optimistic at 2.6%. Tobin’s q, which considers the market value of equities versus the replacement value of their assets shows a -0.5% annual return. Buffett’s measure of Market Value divided by GDP predicts a -2% annualized real return.[1]

All of those measures, which have been shown to have predictive value over time, are not encouraging. If the broad market seems rough, are there any areas that look good for long term investing? If you have read my blogs enough, you probably realize that REITs, utilities, and staples come up a lot. Can you buy those for 10 years and win? Honestly, while I’d be willing to bet that you’d beat the index doing that, starting valuations matter, and even these broad sectors aren’t commandingly cheap.

So how can you find stocks for the long run right now? I’d say there are two basic ways to get there, growth and value. In either case it is fundamentally a risk/reward (R/R) question. Growth is tough. Could there be some technology or other area that is currently valued low but has promise? As the last few decades show, that can be a good and profitable idea, but right now investors have been throwing so much money at growth stocks it’s really hard to find anything that has long term promise at current price levels. That leaves value as the most reasonable long- term R/R solution.

Even within the value universe, finding a great area to invest in for the long term is tough. Frankly, stocks are broadly expensive. Ideally, what would I look for in a stock that I’d hold for 10 years? Fortunately, there’s someone who made a famous career out of just that – Warren Buffett. What did he do?

Particularly in the past, when he was clearly running things, a high-quality business was important. If your holding period is forever, holding high quality companies that can take a small amount of capital and make good money is a clear choice. (A brief, but fair, definition of a high-quality company is one that has stable top-line revenue from which it can generate free cash flow, and so can fund its operations in good or bad times.)

Adversity has generally been viewed as opportunity by Buffett. GEICO had fundamental business problems when he invested. American Express had the salad oil scandal. Berkshire Hathaway, when Buffett bought, was cheap but slowly dying.

So, what should you do? I think it makes sense to look for traditionally high-quality companies that are currently under duress. I think they’re out there for the picking, if you are willing to do the work.

One tip is that investing isn’t generally easy. It’s generally hard. When you see a company with problems whose stock price has dropped, are you looking at a short-term blemish in a company or a long-term problem? People tend to be linear thinkers – whatever happened in the recent past will happen in the future. Don’t be that person, take advantage of that person. When a problem appears, people often get frustrated and sell at any price. Remember when no one wanted financial stocks in 2008? Buffett came in and bought a bunch of them. Be Buffett.

Finding high quality stocks hit by temporary problems can help a portfolio get through some lean times, and it seems likely that we’ll see some lean times in the years to come. Hated, quality, cheap stocks are going to have warts and may not be much fun to buy, but they can do quite well for you – they can be your “Stocks for the Long Run.”


[1] Livingston, Brian. “How low will the S&P go? Buffett and Shiller know.” MarketWatch, MarketWatch, Inc., 29 January 2019, https://www.marketwatch.com/story/how-low-will-the-sp-500-go-buffett-and-shiller-know-2019-01-23.