In the world of investment, like anywhere else, the start of the year is a time for fresh optimism, clean slates and new beginnings. Unlike anywhere else, however, January in the world of investment is also a time for market watchers to offer up lists of stocks to buy and hold for the long term – in which regard, it is instructive to highlight one such example from almost two decades ago, which has since reached near-legendary status.
Now, clearly it is deeply unscientific, not to mention deeply unfair, to focus on a sample of one but, as we say, it is an instructive – and indeed cautionary – exercise. The list of 10 Stocks to Last the Decade was published by the well-respected Fortune magazine back in August 2000 and, to put it mildly, any hedge fund charged with identifying 10 stocks to short over that period would have been proud to come up with such a portfolio.
Almost without exception, the companies picked out did not just underperform the market – they did terribly. To give you a flavour, let’s simply highlight the names: Nokia, Nortel, Enron (yes, that Enron), Oracle, Broadcom, Viacom, Univision, Schwab, Morgan Stanley and Genentech. A decade later, only one company would prove to be in positive territory while two had been wiped out entirely.
So how did Fortune alight on the names? Clearly a fair amount of thought went into it, as the magazine “identified four sweeping trends that we think have the potential to transform the economy”. It went on: “Any one of these four – the lightning-fast changes in communications networking, the brave new world of entertainment, the ‘boomerization’ of financial services, and biotech’s coming of age – is explosive by itself.
“Combined, they appear certain to transform the way we work and interact.” With the benefit of 20/20 hindsight – or indeed 2020 hindsight – we know those statements held a lot of truth. But then the magazine consulted a panel of stockpickers, pared their choices back to 10 and, well, anyone mirroring those selections would have lost a significant amount of their capital.
“One caveat,” Fortune warned at the time. “Momentum traders need not apply. Given the market’s recent volatility, a few of our picks could experience drops over the coming months and years. But if you’re a long-term investor, these 10 should put your retirement account in good stead.” For anyone who followed the magazine’s tips, however, it unfortunately really did not turn out that way.
Forget lasting a decade – in the space of just 18 months, the Fortune portfolio had lost the lion’s share of its value. As Chris Browne observes in his impressively clear, concise and highly recommended introduction to the discipline, The Little Book of Value Investing (2006): “By the end of 2002, these stocks had suffered an average loss of 80%.
“And even after a market rebound in 2003, the aggregate loss was still 50%.” Then, referring entirely justifiably, if a little unkindly, to Fortune’s comment about putting its readers’ retirement accounts “in good stead”, Browne adds: “Maybe you could retire if you don’t mind eating cold beans out of a can and living in a tent.”
As we say, it is deeply unfair to pick on a single set of predictions but there is an important lesson here. What many such ‘buy-and-hold’ lists tend to try and do is identify sectors and businesses that will be able to retain their barriers to entry and returns on capital for a long period of time. The problem – as many of today’s market darlings will also learn in time – is there is no such thing as a permanent competitive advantage.
If you are looking to invest for the longer term, you would do much better to ignore any list of tips and instead focus on buying cheap businesses. As academic evidence has suggested time and again – and as we have written before, in articles such as All in the price – in the long run, it is what you pay for a company, not the growth you see from it, that will prove the biggest driver of future returns.
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