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Predictable companies are long-term hits
Predictability is at the heart of successful investing
There are many high-quality companies that you count on to grow at relatively predictable levels for several decades
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Predictability is at the heart of successful investing
There are many high-quality companies that you count on to grow at relatively predictable levels for several decades
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Their long-term financial prospects can therefore be estimated reasonably accurately, making them easier to value
Such companies are often undervalued because most investors focus on what a company’s share price might do in the next year, rather than taking the long-term view
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Such companies are often undervalued because most investors focus on what a company’s share price might do in the next year, rather than taking the long-term view
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Investors should remember that a business is worth only the money that you can take out of it over time.
Consequently, the economic value of a business is simply the present value of the cash flow that it will produce during the rest of its existence.
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Consequently, the economic value of a business is simply the present value of the cash flow that it will produce during the rest of its existence.
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Many people fail to recognize that most of a company’s economic value is based on cash flow that the company will produce more than 5 years from now
Investors who don’t look beyond the next five years are largely speculating about how a company’s share price will perform 4/
Investors who don’t look beyond the next five years are largely speculating about how a company’s share price will perform 4/
Often this undervalues the shares of predictable businesses with long-term potential
Investing is a probabilistic exercise in which you should be trying to tilt the odds in your favor
Investing in companies with relatively predictable growth profiles can help you do so
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Investing is a probabilistic exercise in which you should be trying to tilt the odds in your favor
Investing in companies with relatively predictable growth profiles can help you do so
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Predictability not only increases your chances of estimating accurately the economic value of a company, it also leads you to companies that you can feel comfortable owning for many years
Owning shares for the long run has the benefit of deferring tax on capital gains.
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Owning shares for the long run has the benefit of deferring tax on capital gains.
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This allows your capital to compound tax free.
To find predictable companies, steer away from sectors where there is a risk of obsolescence (e.g. high tech) or where performance depends on the price of a commodity (e.g. mining, oil and gas).
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To find predictable companies, steer away from sectors where there is a risk of obsolescence (e.g. high tech) or where performance depends on the price of a commodity (e.g. mining, oil and gas).
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A good place to start is with companies that have relatively consistent historical growth and profitability as well as defensible competitive positions.
For instance, the consumer staples sector includes some of the most predictable public companies in North America
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For instance, the consumer staples sector includes some of the most predictable public companies in North America
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A few examples include Brown-Forman Corp., McCormick & Co. Inc. and Wal-Mart Stores Inc.
Short-sighted investors may always see such companies as fully valued, thereby missing out on attractive opportunities.
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Short-sighted investors may always see such companies as fully valued, thereby missing out on attractive opportunities.
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But long-term investors who own these businesses will be sleeping soundly at night, dreaming of compounding returns, and knowing that the companies they own will likely still be growing many years down the road.
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