Building The Bulletproof Portfolio
There is an ample level of risks involved with trading at any level in the stock market. Even the legendary investors get burned by wide market swings from time to time. The difference between the legends and the common investors is the ability to wait out the storm. You only lose money on a trade when you close it out. If you bought a stock for $45 two months ago, and now it is trading at $40, then you will lose money the second you execute a sell transaction. Holding it at $40 purely represents a decline in current value, which can certainly bounce back to $45.
The way to build a bulletproof portfolio is done by accumulating a collection of industry leaders that own a competitive advantage in their respective market, maintain a track record of outstanding financial conditions and growth, and are always looking to reinvent themselves when needed with innovation and creativity. This may seem easier said than done, but in actuality it is far more possible to accomplish than you realize.
The benefit of acquiring industry leaders is the long-term steady growth – that’s it. Long term steady growth should be seen as the opportunity to receive long-lasting appreciating value, while preventing the likelihood of losing any money. The idea is the market share these leaders hold will continuously turn over profits and ultimately reflect the growing value of the company’s stock.
The majority of Industry leaders also provide investors with future cash dividends that can be used as supplemental income or a reinvestment funnel. Stock splits are another reward investors can receive. Over time, companies will issue stock splits when their share price reaches a height that may be too pricey for the everyday investor or simply to dilute the ownership stake of large investors. As a shareholder you benefit (if you hold for many years) from increased share count. The share count addition is great. As prices continue to rise, your stake is valued higher. Plus the more shares you own, the more dividend cash is paid to you.
Microsoft (MSFT) is a company that took off during the tech boom in the late 1990s and early 2000s. Not only has it maintained its success and innovation over the years, it has evolved into one of the most valuable companies in the world.
Congratulations to the person who purchased 100 shares of Microsoft at the beginning of January 1996 for $5.49 per share, and has held the position ever since.
Using December 2016 as the ending point in evaluating the return on this position for a 20-year holding period, the investor would have experienced a return of more than 18,010%. The initial purchase of Microsoft in 1996 was $549 and the last day of December 2016 the position’s value was $99,424. That is a passive investment profit of $98,875. This investment saw an annualized return of nearly 30%.
This is not to mention the cumulative dividends earned over the twenty years of $19,872. The dividends were not included in the above totals, so you can imagine a greater return percentage with these payments added. Dividends can be collected as supplemental income or reinvested to compound returns at an exponential rate.
Starbucks (SBUX) is the leading premium coffee provider, and real estate space owner worldwide behind maybe only McDonald’s (within the food and beverage industry). With over 24,000 café locations globally, the coffee brand just might control the mornings of many workers.
The company’s growth over the past twenty plus years has been remarkable. It has increased in value at such a steady trajectory despite other fast food restaurants attempting to cut into their sales. The investors, who bought into the brand twenty years ago and continue to ride along with the company on its journey, are really benefitting from its continuous growth.
If you purchased 100 shares of Starbucks on the first of January 1996 at market price and have not sold a single share through the end of 2016, the return (not including dividends) is more than 67,710%. After four 2 for 1 stock splits, your original 100 shares would be multiplied into 1,600 shares. Not sure what percentage of your portfolio this position is, but this stake in a business such as Starbucks is excellent.
Over the twenty years, the investment’s annualized return rate would be over 38%. This is what investors earn when they stick with excellent companies over many years. The gross profit for the twenty years would be $88,701. Since dividends did not come into the picture until 2010, the total dividend income collected was a mere $3,772.
The annualized return rates for these two investments over the twenty year period are nothing but spectacular. The stock market returns an average of 7% annually over the long-term holding period, but Microsoft and Starbucks both returned more than 30%. That is an incredible feat, not just for a one year holding period, but for twenty years is rare.
The strategy is absolutely long-term, but that is not the only component to earning results like the two above. The business is undoubtedly as critical as anything when it comes to picking home runs for a portfolio. Remarkable brands do not explode overnight, it takes years to not only gain the market share of their industry, but it also requires much time to gain the loyal consumer base. Brands with sustainable leadership in their industry are built from excellent goods and services that consumers live by, which in turn provides long-term consistent profitability and growth.
The industry leaders who remain atop their respective group most certainly will provide an investor with steady growth over the life of owning the stock. It is directly correlated to patience. Well, plus picking a strong financially and innovative brand. Just as the examples above, there are many outstanding companies who have and will return the value all shareholders desire – for those who stick with the company for the long ride. Sure it will be a roller coaster ride, but in due course the value will be tenfold.
Selecting companies with superior products, brand excellence, and outstanding financial growth will more than likely return a sizable gain – when held for long periods of time. The bulletproof method comes from acquiring these distinct types of companies with the intention of a forever holding period. When outstanding companies experience rising stock prices consistently, the board of directors will issue a stock split. Over the long run the multiplied share count plus consistent share price appreciation, will regularly increase your portfolio’s value over the years. Stay the course.