Stocks That Will Love You Back

Now and then I hold on to articles I've run across, thinking that it will be interesting to revisit them after a year or two. That's what I did with an early 2007 Kiplinger article by Jeffrey Kosnett entitled "Stocks to Love Forever."

The author made some excellent points, such as how dangerous it can be to just buy a stock and hold it "'til death do you part." He suggested that if we bought and blindly held on to stocks such as Wal-Mart (NYSE:WMT) and Ford (NYSE:F), we'd end up sorry. (Why? Because Wal-Mart is a slow grower these days, and Ford operates in the troubled auto industry.)

How'd that go?
Well, it's been a little over two years since he wrote that, but Wal-Mart stock is up 4% since his article was published. Ford, unfortunately, has met a different fate.

I agree with Kosnett, actually, that the idea of uncritically holding a stock forever is a bad one. But in his article, he went on to note, "That said, every stock picker is entitled to get hitched at least once." Huh?!

This apparent contradiction leaves a big loophole to permit possibly lots of buying and blindly holding onto stocks forever. In fact, he went on to name names, suggesting that the following were good long-term bets: Goldman Sachs (NYSE:GS), Starbucks (NASDAQ:SBUX), Steel Dynamics, Stryker, and York Water.

And their performances?

Data from Yahoo! Finance.

Time isn't always kind
Kosnett's argument for Goldman Sachs shows us how seemingly sure things can be anything but. He explained that the economic environment at the time was "golden for investment bankers." (Of course, we now know that the golden age of investment banks is probably over, and Goldman Sachs will be transitioning into a bank holding company, subject to much more regulation.)

He noted that, "Only a sudden economic downturn, a series of breathtaking trading breakdowns, or a Federal Reserve interest rate surprise would seem to be in Goldman's way." Hello, sudden economic breakdown! He uttered these words, too, which I suspect he may now regret: "This is one of those rare stocks that never breaks down, unless you count a sluggish period during the recession year of 2002."

Maybe I'm not being fair
I don't mean to disparage Mr. Kosnett too much, though, because back when he wrote those words, it would have been difficult to imagine a financial panic and brutal recession. Moreover, many of these investments could turn around; not all fallen stocks are mistakes. I mainly want to point out how dangerous it can be to become complacent about pretty much any stock.

The lessons here are:

• There are no sure things in the stock market.
• Short-term performances can be all over the map. The long term is what matters.
• Do your own thinking and deciding.

When marrying works
I'll also concede that marrying a stock can work. Sort of. You can invest in a company with the intention of holding on for decades, as long as you keep tabs on it. If you approach your investing with a long-term view, it can help you to zero in on the truly impressive companies, and it may help you refrain from driving up transaction costs by trading too frequently.

Warren Buffett, for example, essentially marries the businesses he buys -- so you can be sure that he maintains high standards. When investing, he likes to see (among other things) sustainable competitive advantages, such as economies of scale, network effects, intellectual property rights, brand strength, and high switching costs.

To understand the power of competitive advantages, think of the world's leading soft drink company -- I know you can do it without my even naming it. Buffett has said that if you offered him $100 billion to take away its dominance, he'd refuse, saying it can't be done.

Find better stocks
You stand a good chance of doing well by looking for companies that interest you, instead of those that interest financial writers like Mr. Kosnett and myself. If water and steel companies make your eyes glaze over, then some of Kosnett's picks were probably not for you.

To help you zero in on promising companies, perhaps use a screener, looking for robust growth rates, strong profit margins, and dividends as a way to start. I did that recently and selected a few:

Data from Yahoo! Finance and Capital IQ, a division of Standard & Poor's.

Remember: Screens should only be a starting point for further research. After you get your initial results, pick companies you know and like already, ones you'd be most likely to follow over the coming years. (If you want to have a chance of loving it forever, it would help to like it at first.) Research contenders further, checking out debt levels, management communications, and valuation.

If this seems like a lot of work (it's not rocket science, but it does take time, and some skill), consider looking for recommendations from sources you trust -- they can do much of the initial legwork for you. I invite you, for example, to test-drive, for free, our Motley Fool Stock Advisor newsletter, which recommends several well-researched stocks that we believe have the financials and competitive advantages to continue growing for decades. Its recommendations have been outperforming the market by more than 40 percentage points -- despite this crummy economy. You can click here for instant access to all past issues and top recommendations.

However you do it, it's smart to think about buying into companies these days, taking advantage of what might be the best investing opportunity in 35 years.

You can fill your portfolio with stocks you can hope to love forever. Just don't count on any of them being a sure thing.

Longtime Fool contributor Selena Maranjian owns shares of Starbucks and Wal-Mart. Quality Systems and Starbucks are Stock Advisor picks. Starbucks, Stryker, and Wal-Mart are Motley Fool Inside Value recommendations. Procter & Gamble is a Motley Fool Income Investor selection. The Fool owns shares of Stryker, Procter & Gamble, and Starbucks. The Motley Fool is Fools writing for Fools.