LONDON -- If you had to pick one share and one share only for the rest of your life, which would it be?
I asked the same question a year ago, and it elicited 71 responses. So I thought it would be interesting to see if our answers would differ today.
Last summer, the world was feeling a little rosier about its prospects than it is today -- and the weather was better, too. But neither lasted long. The same eurozone fears that continue to dog the market soon knocked the shine off the FTSE 100 index. At the time of the article, it was at 5,991; today, it's down to 5,479, a near 9% drop, having visited 4,791 along the way last August.
The hypothesis' conditions were as follows:
- The share constitutes your entire sum of investments.
- It needs to pay your future pension.
- You will need to keep adding investments into the same company (and that company only) from your earnings until your retirement.
- It may not be a collective investment such as an Investment Trust or Unit Trust.
- You may not sell any of the shares before retirement -- when you may decide to sell of parcels to live on, and/or take the dividends.
It's an interesting hypothesis. No sane investor would follow it in practice, but as Warren Buffett said 20 years ago: "An investor should act as though he had a lifetime decision card with just 20 punches on it. With every investment decision his card is punched, and he has one fewer available for the rest of his life."
In other words, investors will tend to enjoy better returns from a relatively small number of shrewd decisions. And the discipline imposed by such a hypothesis is a useful one to think about.
But how do you identify such shares? What characteristics would they exhibit?
Things to look for
I would say the company you seek should:
- Be growing at a reasonable rate.
- Demonstrate basic good value credentials such as a lower than average price-to-earnings (P/E) ratio, a strong balance sheet, and good cash flow.
- Have a history of steadily increasing earnings and an above-average yield.
- Supply essential products or services, and have a moat in so doing.
- Be trustworthy and prudent.
- Have a lower average enterprise value to sales ratio than its peers.
The results were interesting. Although not all the comments were 'votes' and accepting the fact that the results might have been very different if they were, the following table shows the list the readers came up with in descending order of popularity:
Share price 11 July
Closing price 15 June
|British American Tobacco (NYSE: BTI )||2,839.5p||3,100.5p||9.2%|
|Diageo (NYSE: DEO )||1,291p||1,587.5p||23%|
|GlaxoSmithKline (NYSE: GSK )||1,357.5p||1,441p||6.2%|
|HSBC Holdings (NYSE: HBC )||615.5p||546.4p||-11.3%|
|FTSE 100 Index (INDEX: ^FTSE ) (comparator)||5,991||5,479||-8.6%|
*Excluding dividends. So, a mean average performance per share of -4.93% (excluding dividends) versus the FTSE's 8.6% decline.
The standout stats come from Diageo on the plus side, with Tesco and Weir spoiling the party. Tesco's fall from grace has been well documented and much discussed at the Fool.
Pump and valves specialist engineer Weir has suffered from the feared global slowdown, and specific concerns that low U.S. natural gas prices would limit orders for equipment for the shale gas industry.
Diageo, on the other hand, has been going great guns. Perhaps we're all drowning our sorrows in Guinness?
The companies that made the short list are all likely to be around for a good while yet, and the demand for their goods and/or services will remain reasonably robust come what may. Presumably, this is why they were selected. But if we'd run such a hypothesis at other times, the results may have been very different.
What would your selection be today? The same fears are still around. For the record, mine would be Sainsbury at 285.7p for its reasonable P/E of under 10, prospective yield of over 6.2%, healthy price-to-book value of 0.98, and essential nature.
Finally, legendary investor Warren Buffett recently bought into one of the companies featured into the table above. To discover which one -- and the price he paid -- take a look at our latest free report, which will be delivered straight to your inbox.
Further investment opportunities: