In 2008, two investment managers crunched more than 20 years of market data and produced findings that can only be called shocking.
Eric Crittenden and Cole Wilcox found that most stocks did significantly worse than the overall market averages over time, and an unexpectedly large number fell dramatically. These losses were offset by a few stocks that rose spectacularly.
As Wilcox wrote, “Capitalism produces a surprising number of extreme winners and losers each and every year.”
Examining returns from 1983 to 2006, the two money managers found that 64% of stocks had a lower return than the Russell 3000 index (a measure approximating the entire U.S. market) over the full period. Some 18.5% of all stocks lost 75% of their value or more. On the other hand, 6% of stocks beat the Russell 3000 by 500% or more, and 25% of stocks accounted for all of the market’s gains.
Despite this lumpy distribution, the winners and losers combined to produce average annual returns, including dividends, of about 10% and deliver a fairly smooth ride for long-term investors – a concept that was the foundation of a book I coauthored in 1999, Dow 36,000. During no 15-year period in a century, for instance, have stocks lost money after inflation.
As a result, a simple, profitable way to invest is to buy the market through exchange-traded funds that are linked to an index, such as the Russell 3000 or the S&P 500, or managed mutual funds with strong track records and low turnover and expense ratios, such as Dodge & Cox Stock (DODGX) or T. Rowe Price Dividend Growth (PRDGX), both members of the Kiplinger 25, the list of Kiplinger’s favorite no-load, actively managed funds.
But the findings of Crittenden and Wilcox beckon investors in another direction – toward trying to find the “Golden 6%” of stocks that will produce returns that quintuple those of the broad market.
Find the High-Scoring StocksOn the theory that what goes up continues to go up, the two authors of the study are believers in “trend following” – investing in assets with values that have been hitting new records.
Wilcox wrote 10 years ago in a foreword to The Little Book of Trading that if your portfolio were an NBA team, such a strategy would lead you to “own the LeBron Jameses, Kobe Bryants, and Dwight Howards of the world. There are many able players in the NBA, but only a handful of difference makers.”
Crittenden and Wilcox make a valid point, but good players are expensive, and even the Los Angeles Lakers have won the NBA title only four times in the past 20 years.
My view is that investors should search for the Golden 6% among companies that have the chance to achieve spectacular business success. Your targets are innovators with big ideas, adaptability and mammoth potential markets.
Think of yourself as a venture capitalist, less concerned with companies such as Procter & Gamble (PG) or Johnson & Johnson (JNJ) that will keep making secure profits and raising dividends in favor of firms with gigantic prospects.
But like Crittenden and Wilcox and unlike real venture capitalists, I want to see concrete signs of success before buying potential outsize performers, and I want to hold their shares for decades. Here are five candidates for the best stocks to own for decades (all returns and data are as of Jan. 7):
TeslaSymbol: TSLAShare price: $1,027Market value: $1.0 trillionPrice-to-earnings ratio: 124One-year return: 25.9%I am well aware that Elon Musk’s electric-vehicle and energy-storage (that is, battery) company has a market capitalization (stock price times shares) of more than $1 trillion, that it trades at a price-earnings ratio of more than 100 based on a consensus of analysts’ projected earnings for 2022, and that, after a big head start, it now faces competition from nearly every automaker in the world.
Still, Tesla has built the strongest EV brand in the world and is led by a dynamic CEO. The company sold 936,000 autos in 2021, a year when 66 million new cars of all kinds were bought worldwide. Almost certainly, by the end of the decade, EVs will account for half of all car sales. This is only the beginning.
Uber TechnologiesSymbol: UBERShare price: $42Market value: $80.3 billionPrice-to-earnings ratio: N/AOne-year return: -26.1%It hasn’t been a great year for Uber. After hitting new highs in the first few months of 2021, the stock slid by more than 40% from its peak.
Trend followers will be deterred, but I’m still convinced that ride-sharing is the future and that smaller, ancillary businesses including food and freight delivery could grow into huge money-makers.
Uber now operates in 71 countries, including Australia, Brazil, Germany, Qatar and Tanzania. The company, which made its first operating profit only in the third quarter of 2021, has encountered problems, such as a driver shortage and the insistence by some tax authorities that drivers are employees and not contractors. But those obstacles also discourage competition and keep Uber’s price attractive – for now.
Nextdoor HoldingsSymbol: KINDShare price: $7Market value: $2.6 billionPrice-to-earnings ratio: N/AOne-year return: N/AOther companies have tried and failed to break into the hyper-local media market, but Nextdoor may succeed, becoming a fabulous online advertising vehicle. With reader-generated content – lost cats, car break-ins, restaurant tips, questions about where to get a COVID test – Nextdoor seems to have figured out how to engage audiences where they live.
With a strong management team led by Sarah Friar, formerly chief financial officer of Square, Nextdoor is quickly boosting revenues. The company went public through a special purpose acquisition company (SPAC) in November. Shortly before that, Nextdoor reported that it had 33 million active users in the third quarter, with revenues of $52.7 million, up 66% compared with the same quarter last year.
Nextdoor, down 48% since its debut, is the outlier in this quintet: still tiny, with a market cap of $2.6 billion, and highly speculative.
LVMHSymbol: LVMUYShare price: $163Market value: $407.1 billionPrice-to-earnings ratio: 30One-year return: 33.7%Following Wilcox’s LeBron James rule, I’m recommending the premier luxury-goods stock in the world.
No other company comes close to matching the portfolio that CEO Bernard Arnaud has put together. In addition to the eponymous leather goods and champagne firms, LVMH owns 75 prestigious global brands with 5,000 retail outlets, including Christian Dior, Givenchy, Tiffany, Dom Perignon, the Belmond hotel chain and many more.
If you believe the world will keep getting wealthier, this is the stock to own.
Walt DisneySymbol: DISShare price: $158Market value: $286.9 billionPrice-to-earnings ratio: 34One-year return: -11.6%Can an entertainment company with a $287 billion market cap have a shot at massive growth over the next decade or two? If it’s Disney, then yes. The stock had a rotten 2021, but with new leadership, a world learning to live with COVID, a dozen theme parks and brands that include Pixar, ESPN, Star Wars, the Muppets, ABC and Disney+, the company’s two-year-old video service, Disney is ready to accelerate. On top of that, Disney is modestly priced.
And, like Uber, Disney is one of Kiplinger’s best stocks to buy for 2022.
Understand that your retirement assets should still be dominated by funds like the ones I mentioned earlier, along with solid individual stocks such as P&G and J&J. Golden 6% candidates should represent no more than 20% of your holdings.
Finally, if they take off, resist the urge to sell. In July 2019, Tesla was trading at $45 a share. Within six months, it had quintupled, but if you sold then, you would have missed another quintupling. They don’t all work out like that, but, as in Disney’s movie business, it’s the massive winners that count.
James K. Glassman chairs Glassman Advisory, a public-affairs consulting firm. He does not write about his clients. His most recent book is Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence. Of the stocks mentioned here, he owns TSLA and UBER. Reach him at james_glassman@kiplinger.com.