FYI | Jun 17 2020
By Peter Switzer, Switzer Report
Invest in quality for the long term? Can do!
On many occasions I have explained how I invest but possibly a new reader of oneP.Switzerinquired what I mean when I say: "Buy quality companies, when the market is down, and hold them for the longterm."
Using the Twitter platform Stu pondered what I actually mean when Isay"for the longterm."
Stu tweeted his question with the following chart but I'm not sure why:
I can't see the relevance of a volume chart but I can see why someone might look at the stock price showing a quality company such as CBA and wonder how long is this "longterm" of which you speak and how long do I havetowait to make money?
Before looking at such a chart, let's look at theInvestopediadefinition of the longterm.
"Long term refers to the extendedperiod of timethat anassetis held. Depending on the type of security, a long-term asset can be held for as little as one year or for as long as 30 years or more," it explains."Generally speaking, long-terminvesting for individuals is often thought to be in the range of at least seven to10years of holding time, although there is no absolute rule."
I see the mid-termas2to5years. Anything less goes into the shortterm or very shortterm, which puts you in the "you're trading and punting" class.
Let's look at the CBA over these time periods
The short-term player would have had a rotten experience of the CBA seeingitsshare price drop from $91 before the Coronavirus crash to a low $54.26 on March 23. That's a 40% loss. However, since then,the stock in the very shortterm has rebounded to $67 so the gain has been 23%.
And the story doesn't improve that muchover the medium term, which makes me happy I never say: "Buy quality companies for the mediumterm!"
But let's get this in perspective. In 2015,the Government implemented restrictive measures on the banking system to make our banks' balance sheets stronger, which cut into profitability. At the same time,APRA cracked down on lending to Asian property buyers and then,in late 2017,the Hayne Royal Commission was set up and we can see that this company and its rivals have faced a perfect storm of headwinds bordering on cyclones!
Certainly,if you only got into CBA over the past five years and had taken my advice and bought it on each serious dip, you would haveadollar cost average share price of about $70.
But over thattime,youwould have received about an 8% return via dividends and franking credits, which isn't bad for a poor mid-term performer.
What about the longterm?
Here the story well and truly endorses my view that you buy quality companies when the market isdown,and you wait for the longterm.
This chart says the CBA went as low as $28in January 2009 but even if you had waited to mid-2009 and bought in at $40,your capital gain would be 67.5% and your most recent dividend yield was 10.7% plus franking!
Withall ofitsexternallyimposedproblems, it still has been a good long-term investment.
And what if we selected acompanythat hasn't had a constant run in with Government,suchasCSL or Woolworths?Would they reinforce my argument that buying quality companies when they're being smashed is a good investing idea?
You don't get rich in a day but daily.You grow your wealthby being invested in quality companies for the longterm. I rest my case.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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