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Experienced Investor

Get rich slow: Tips for long-term investing

Kit Klarenberg
Written By:
Kit Klarenberg
Posted:
Updated:
06/05/2015

Warren Buffett famously once said the best holding period for a share was “forever”. This legendary quote underlines the reality that real investment gains are not made from the constant trading of shares, but from ownership.

In the current low to no growth environment, long-term investing may seem a tall order. However, for Keith Bowman of Hargreaves Lansdown, there is little alternative.

“The basic idea of buying shares is to earn a rate of return that, over time, surpasses that offered by alternatives – bonds, or cash,” Bowman says.

“In the current climate, with cash offering nothing and bonds not that much more, share ownership is not only the best option – but perhaps the only one available to investors.”

Bowman identifies a number of key features that mark out a share as a long-term investment prospect.

Firstly, he warns against basing an investment case purely on a company’s current standing. “When looking for long-term investment prospects, the obvious temptation is to look for businesses that are market leaders in their respective fields,” Bowman says.

History is littered with examples of businesses that once occupied premier positions in their sector which many assumed were unassailable, only for the firms to relinquish ground to new competitors, or be wiped out entirely.

“Even Coca Cola, considered a safe bet for almost a century, has been losing market share recently due to a move towards healthier dieting in established markets,” observes Bowman.

“Nonetheless, longevity and size have their place – but it’s important to consider these features alongside other, more important facets.”

Chief among these for Bowman is a proven track record of shareholder-friendly conduct.

“An obvious indicator of this kind is a share’s history of paying a dividend. However, beyond simply paying a dividend, look for shares that have increased dividends over time, or indeed have protected dividends even in less successful periods.”

Long-term investors would also do well to look for shares that offer enduring utility, which cannot be supplanted due to technological disruption – and won’t fall out of favour due to fickle consumer tastes and habits.

“On this basis, tech shares are one to avoid,” Bowman believes. “Tech companies almost always occupy a fragile position, where a failure to adapt to emerging trends in time can sink them. Bear in mind the example of Blackberry.”

Five years ago, there were almost 100m Blackberry devices in use worldwide, and the business was regarded as the future hegemon of the telecommunications industry; today, the number of Blackberry users internationally is closer to 30m, and there is speculation the company may not endure beyond the end of this year.

“The hotel sector is the ideal counterexample,” he says. “Despite the rise of Airbnb and the like, people will always need to use hotels, and the rise of new markets means there’s an ever-increasing demand for them internationally.

“There might be some fluctuations owing to seasonal factors, or reduced travel expenditure during economic downturns, but shares in global hoteliers are certainly a long-haul investment.”

All too often, investors update their portfolios by selling off investments that have appreciated, and holding stocks that have stagnated or depreciated, in the hope that the latter will rebound.

However, Bowman believes that the best long-term strategies take an entirely antithetical approach – there is, after all, no guarantee that a well-performing share won’t appreciate even further, nor that a poor-performer will inevitably ‘bounce back’ in due course.

“The best long-term investors don’t panic when an investment performs poorly in the short-term, either,” says Bowman.

“Even the strongest performing shares can endure brief, fluctuant periods from time to time. While day traders exploit minute volatilities to make short-term gains, the profits of a long-term investor by definition come from market movements spanning decades.”