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Good stocks to own without having to pay attention to


Mephistopheles
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What are examples of stocks that you would own and sleep well at night without the need to heavily research? The only one that I have that fits this criteria is BRK, for my parents, but I want to add a few more.

 

Second part to the question is, what is the appropriate measure of value for such stocks. Again with Berkshire, I stick with Price/Book.

 

I know very little about Fairfax or Merkel, but it seems that many here would recommend them. Are they also valued on price/book?

 

If there aren't too many stocks that fit this criteria, I don't even mind looking into solid value mutual fund managers.

 

Thanks.

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Certainly not any one of the Liberty stocks. Nor BH.  ;D

 

Why not just have them buy low-cost index funds? If they don't have any special affinity for Markel the company or their philosophy, why should they own that over simply owning a representation of the larger economy?

 

Well, I'd still like to beat the market, even if by a small margin like with BRK. Actually they don't have an affinity for any stock, as I'm the one who takes care of their portfolio lol. But I've realized I don't have enough time nowadays to follow 10 different stocks.

 

I won't be blindly putting the money into anything, of course. I don't mind learning more about Fairfax/Markel through shareholder letters and earnings releases. But I'd rather not worry about doing a deep dive of the financials.

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Well, I'd still like to beat the market, even if by a small margin like with BRK. Actually they don't have an affinity for any stock, as I'm the one who takes care of their portfolio lol. But I've realized I don't have enough time nowadays to follow 10 different stocks.

 

 

 

I'll take one free lunch, please.

 

But seriously, read your post again. I want above-average returns with near-zero risk and zero time commitment. Many people spend serious time in hopes of just improving their chances at the first 2...

 

Just my own opinion, but you should re-consider what you are attempting with your parents' money. Your expectations seem extremely lofty and it is probably worth ~1%/year to get an independent steward who's willing to spend an adequate amount of time on due diligence.

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Check out Stephen Romick's FPA Crescent fund (FPACX).  He's built a 20 year record of material out-performance.  I think the strategy especially well for individuals who know little to nothing about investing.  Reason being, Romick tends to hold a lot of cash which significantly reduces volatility. 

 

Another option to consider is a fundamentally weighted index.  I've been looking at these more recently.  The actual performance of these offerings (which haven't been around all that long) has been pretty good.  They have out-performed a bit.  Rob Arnott created the Wisdom Tree methodology. 

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Well, I'd still like to beat the market, even if by a small margin like with BRK. Actually they don't have an affinity for any stock, as I'm the one who takes care of their portfolio lol. But I've realized I don't have enough time nowadays to follow 10 different stocks.

 

 

 

I'll take one free lunch, please.

 

But seriously, read your post again. I want above-average returns with near-zero risk and zero time commitment. Many people spend serious time in hopes of just improving their chances at the first 2...

 

Just my own opinion, but you should re-consider what you are attempting with your parents' money. Your expectations seem extremely lofty and it is probably worth ~1%/year to get an independent steward who's willing to spend an adequate amount of time on due diligence.

 

I take your point, but I don't think I agree.  My entire investing philosophy is based on the following thoughts:

 

1. The index has a lot of crap stuff in it.

2. It also has a lot of great stuff in it.  Very long run businesses serving needs that don't change much with competitive moats and that generate cash while growing slowly over the long term.  Or, jockey stocks with amazing jockeys.

3. If one puts in the initial leg work to identify great stocks, and one is selective about buying them at times when their valuation is low compared to history, one ought to be able to build a portfolio that doesn't need much attention and does outperform the index (compounded from the start, not in every discrete year) with near zero real risk* over the long term.

4. I would actually go so far as to say that doing due diligence AFTER the initial purchase might be actively harmful.  Once I have satisfied myself that a business has a decent probability of lasting forever and can price with inflation and grow a little in real terms, I do everything I can to forget I own it.  I'm usually not successful and so I sell things based on macro analysis, and usually regret it. 

 

For starters I'd look seriously at

FFH MKL BRK

KO PEP DGE CL NESN and their peers, of which there are lots

MMM JNJ

 

*I think of short term risk in terms of dividend income and long term (15y+) risk in terms of purchasing power.  In other words, I judge my wealth on dividend income now and capital in the very long term.  I don't judge it based on what Mr. Market quotes me for my stocks today.

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Well, I'd still like to beat the market, even if by a small margin like with BRK. Actually they don't have an affinity for any stock, as I'm the one who takes care of their portfolio lol. But I've realized I don't have enough time nowadays to follow 10 different stocks.

 

 

 

I'll take one free lunch, please.

 

But seriously, read your post again. I want above-average returns with near-zero risk and zero time commitment. Many people spend serious time in hopes of just improving their chances at the first 2...

 

Just my own opinion, but you should re-consider what you are attempting with your parents' money. Your expectations seem extremely lofty and it is probably worth ~1%/year to get an independent steward who's willing to spend an adequate amount of time on due diligence.

 

I take your point, but I don't think I agree.  My entire investing philosophy is based on the following thoughts:

 

1. The index has a lot of crap stuff in it.

2. It also has a lot of great stuff in it.  Very long run businesses serving needs that don't change much with competitive moats and that generate cash while growing slowly over the long term.  Or, jockey stocks with amazing jockeys.

3. If one puts in the initial leg work to identify great stocks, and one is selective about buying them at times when their valuation is low compared to history, one ought to be able to build a portfolio that doesn't need much attention and does outperform the index (compounded from the start, not in every discrete year) with near zero real risk* over the long term.

4. I would actually go so far as to say that doing due diligence AFTER the initial purchase might be actively harmful.  Once I have satisfied myself that a business has a decent probability of lasting forever and can price with inflation and grow a little in real terms, I do everything I can to forget I own it.  I'm usually not successful and so I sell things based on macro analysis, and usually regret it. 

 

For starters I'd look seriously at

FFH MKL BRK

KO PEP DGE CL NESN and their peers, of which there are lots

MMM JNJ

 

*I think of short term risk in terms of dividend income and long term (15y+) in terms of purchasing power.  In other words, I judge my wealth on dividend income now and capital in the very long term.  I don't judge it based on what Mr. Market quotes me for my stocks today.

 

If the index has a lot of crap then wouldn't buying the entire index except for the worst five stocks provide material outperformance?  Seems like an easy method to me, just figure out which five stocks are the worst and drop them..

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I see that a bull market definition of risk is now in full force.  ::)

 

Ha ;)

 

In my (limited) defence, I've used this definition a) only for my PA investing and b) since I started PA investing in earnest in 2009.  As far as I am concerned it is currently showing a red flag since I'm not too sure that even the 'great' stocks are priced to protect long run purchasing power.  I'm certainly not using it to justify current valuations and have 50% of my money in cash and FFH.

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If the index has a lot of crap then wouldn't buying the entire index except for the worst five stocks provide material outperformance?  Seems like an easy method to me, just figure out which five stocks are the worst and drop them..

 

Yes it would.  I just find it easier (in theory at least - only time will prove me right or wrong in reality) to pick a few good stocks than a few bad ones.  And I have to do a lot fewer trades ;)

 

But yes, avoiding the crap ought to guarantee outperformance, by definition.

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I'll make an alternative suggestion to look into Graham's defensive investor strategy.  I've not seen as much performance data as I'd like, but here is a little bit: http://www.forbes.com/sites/investor/2012/12/18/ben-grahams-60-year-old-strategy-still-winning-big/ .

 

My trouble with this type of investing is I think you are making a pretty vague case for your investments and you could get shaken out of them.  During a crash a vague sense of what the world will look like in 2045 is not going to keep me calm, but a strong balance sheet and a good history of profitability along with a low valuation will.  If one of these got cheap enough it would be different, but everyone knows these are great companies so that almost never happens.  Also, I think that if you went back 30 or 40 years and got the answers to this question you'd find a lot of the companies aren't doing that well anymore.  Of course we think we'll pick better than they did.

 

Anyway, I don't really know what I'm talking about here, but I'll go ahead and weigh in (I've considered making that my signature)

 

railroads

adm

McDonald's

Diageo

dr. pepper

fedex

Coca-Cola

clorox

nestle

google

Fair Isaac

Procter & Gamble

ups

Brown-Forman

Hershey

WD-40

Equifax

starbucks

Colgate-Palmolive

mondelez

anheuser

Ebay

water companies

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I'll make an alternative suggestion to look into Graham's defensive investor strategy.  I've not seen as much performance data as I'd like, but here is a little bit: http://www.forbes.com/sites/investor/2012/12/18/ben-grahams-60-year-old-strategy-still-winning-big/ .

 

My trouble with this type of investing is I think you are making a pretty vague case for your investments and you could get shaken out of them.  During a crash a vague sense of what the world will look like in 2045 is not going to keep me calm, but a strong balance sheet and a good history of profitability along with a low valuation will.  If one of these got cheap enough it would be different, but everyone knows these are great companies so that almost never happens.  Also, I think that if you went back 30 or 40 years and got the answers to this question you'd find a lot of the companies aren't doing that well anymore.  Of course we think we'll pick better than they did.

 

Anyway, I don't really know what I'm talking about here, but I'll go ahead and weigh in (I've considered making that my signature)

 

railroads

adm

McDonald's

Diageo

dr. pepper

fedex

Coca-Cola

clorox

nestle

google

Fair Isaac

Procter & Gamble

ups

Brown-Forman

Hershey

WD-40

Equifax

starbucks

Colgate-Palmolive

mondelez

anheuser

Ebay

water companies

 

Some great companies there!  Personally I'd exclude anything that hasn't been around for 50+ years, just because that tells me they have survived a lot of change, but that's just me.  I like JNJ for having a 130y + summary of earnings in their annuals!

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Another option to consider is a fundamentally weighted index.  I've been looking at these more recently.  The actual performance of these offerings (which haven't been around all that long) has been pretty good.  They have out-performed a bit.  Rob Arnott created the Wisdom Tree methodology.

 

Perhaps I'm misunderstanding you, but Arnott is co-founder of RAFI and "created" the rafi index methodology.  Schwab and Powershares have ETFs tracking these indexes (each with small tweaks).  So does ishares via tracking the MSCI "value-weighted" indexes.  I think he has stated that dividend weighting, as championed by WETF and others, should outperform over the long term as well (so should volatility weighting and revenue weighting, according to some...basically anything that doesn't systematically overweight the glamour stocks like cap-weighting does).

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Have your parents buy a solid mutual fund.  Here are a few names:

 

RWGFX

FPACX

LOGIX

 

However, I agree with some of the other comments expecting even slightly better returns without committing time basically leaves you contradicting yourself.  The extra work done right equals the extra returns.  That being said buy (average into) Berkshire and tell your parents to enjoy retirement. 

 

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Have your parents buy a solid mutual fund.  Here are a few names:

 

RWGFX

FPACX

LOGIX

 

However, I agree with some of the other comments expecting even slightly better returns without committing time basically leaves you contradicting yourself.  The extra work done right equals the extra returns.  That being said buy (average into) Berkshire and tell your parents to enjoy retirement.

 

What I'd recommend also. Averaging into is a good suggestion. We'll leave the outperformance (or not) of BRK over the index to the pundits.

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What are examples of stocks that you would own and sleep well at night without the need to heavily research? The only one that I have that fits this criteria is BRK, for my parents, but I want to add a few more.

 

Second part to the question is, what is the appropriate measure of value for such stocks. Again with Berkshire, I stick with Price/Book.

 

I know very little about Fairfax or Merkel, but it seems that many here would recommend them. Are they also valued on price/book?

 

If there aren't too many stocks that fit this criteria, I don't even mind looking into solid value mutual fund managers.

 

Thanks.

 

For the first part, why not look at Berkshire's portfolio itself?

 

For the second part, why not look at the price Berkshire paid? If it was not recently purchased or added to, then you can adjust for a few years of 6-7% compounding to get at the adjusted price paid.

 

Vinod

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I see that a bull market definition of risk is now in full force.  ::)

 

^This

 

If you don't want to put in the work to find and follow stocks, focus on asset allocation, dollar cost averaging and rebalancing.  Find a plan you and your family is comfortable with and stick to it.  ETFs and index funds make this easier and cheaper than ever.  Your returns will be acceptable but not outstanding.

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I see that a bull market definition of risk is now in full force.  ::)

 

^This

 

If you don't want to put in the work to find and follow stocks, focus on asset allocation, dollar cost averaging and rebalancing.  Find a plan you and your family is comfortable with and stick to it.  ETFs and index funds make this easier and cheaper than ever.  Your returns will be acceptable but not outstanding.

 

This is wise advice.

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A partial list of companies I really like (Some repeated from earlier; bold are my favorites; I've purposely left out some). I think "moat" is by-far the most overused and misunderstood phrase. The majority of industries don't have and never will have a single company with a moat

 

Looking at this list, most have earnings that are quite volatile or stable cash flows with little-to-no growth potential. If you find a company with an incredible business and a long runway for 10%+ growth in earnings then it is "cheap" at nearly any price. To get 10% CAGR over time, if you have a company growing earnings at 15%+ over 20 years then you should be willing to pay 50x - 60x earnings presently. This is not intuitive for myself. If you can grow earnings at 20% over that same time then 100x earnings is cheap! Buffett buying 10%+ growth companies (over 15-20 year periods) for 10x EBIT is the reason he was able to return 25%+ over very long periods of time.

 

Total Returns = [(1 + ME) * (1 + OR)^N)] - 1

CAGR            =  ([(1 + ME) * (1 + OR)^N)] - 1) ^ (1/N)

 

*ME = Multiple Expansion (Return from difference of P/E or FCF/Share at purchase and sale)

*N = Time in Years

*OR = Operating Earnings/EBIT/FCF (whatever you want to use)

YOU CAN NOT CIRCUMVENT THIS FORMULA! All returns are bound to multiple expansion and growth in earnings. When you pitch a stock that's trading at 8x P/E and you think it should go to 15x P/E then you are trying to get expected returns from the less predictable and less important term in the equation. It seems much easier to me to find companies with more assured earnings growth and hope that the P/E I bought at will be pretty close to what I sell it at. Short-run returns will be lower but long-run returns will be more predictable and likely higher in my opinion.

 

APH

CHRW

HSY

PSA

TSS

BR

FICO

MCO

MHFI

AXP

BF-B

BRK-B

C/WFC/BAC/JPM

CME

DIS

FOXA

IFF

MKC

IT

JNJ

PG

CHD

LUX

MA/V/(PayPal)

MON

DD

OTCM

GOOG

INTC

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I agree with some of the other comments expecting even slightly better returns without committing time basically leaves you contradicting yourself.  The extra work done right equals the extra returns. 

 

I wonder how many people expressing this opinion have outperformed BRK (or FFH) in the last 10-15 years.

 

In reality, if someone chooses jockey well, they can go away and do nothing for 10+ years and still outperform the index. And possibly more than people putting in 20 hours a day into stock analysis.

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If the index has a lot of crap then wouldn't buying the entire index except for the worst five stocks provide material outperformance?  Seems like an easy method to me, just figure out which five stocks are the worst and drop them..

 

I've heard this before, but this suggestion is a fallacy for market weighted indexes. If the worst five stocks are - let's say - 0.1% of the index, your outperformance will be at best 0.1%, but your cost to have index minus five stocks will be possibly higher than that.

 

You probably would have to find "five percent of stocks that are worst and drop them", which might be quite harder.

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