Despite chaos in the financial markets and murky economic trends, the market-beating gains from my 50 Best Stocks in the World portfolio show that you can still ignore all that stuff and just concentrate on buying and holding the best stocks.At least that's the evidence from nine years of this long-term portfolio. Buy and sell just once a year and keep turnover at those annual revisions to just 10%. (That's five buys and five sells out of a portfolio of 50 stocks.) Then hold -- and count your gains. The gain on the 50-stock portfolio as of the market close Sept. 20 was 20.66% for the previous 12 months. That beat the 14.83% gain of the Standard & Poor's 500 Index and the 18.37% gain of the Nasdaq Composite Index. And it has worked out just fine during the nine years that I've run this portfolio. For those years, the 50 Best Stocks in the World portfolio is up 70.96% vs. a 49.12% gain for the S&P 500 and a 59.74% gain for the Nasdaq Composite. By the way, you can do even better than this by following macroeconomic trends and picking sectors that benefit from those trends. But that style of investing takes more work and time than many people have. And it's a more aggressive style, with bigger ups and downs, than many investors are comfortable with.
Picking and ChoosingThe theory behind the 50 Best Stocks in the World is pretty simple in outline. The goal, as I put it when I started the portfolio in September 1998, was to compile a list of 50 blue chips that earned that often-too-easily bestowed moniker because:
- They had truly outstanding opportunities for global growth ahead of them over the next five or 10 years.
- They had a competitive edge that would allow them to seize the lion's share of that global opportunity. This is critical in the selection process.
Sizing Up PfizerTake Pfizer ( PFE), a longtime member of the 50 Best portfolio. It's clearly out of favor with investors. The stock's chart stinks: The 50-day moving average has just fallen through the 200-day moving average, and that is usually a sign of more trouble ahead.
- Has either of those two competitive advantages decayed enough to make this company just, well, ordinary?
- Has the industry changed so much that other competitive advantages are now more important in determining a company's long-term success?
- Make up for any patents expiring.
- Keep the sales force busy.
- Push up revenue and earnings by the kind of 10% growth that investors in drug stocks still look for.
Four More DropsThe same kind of analysis is behind my four other drops this year:
- Duke Energy (DUK). The competitive advantage in the utility industry has shifted to companies with big unregulated power-generation businesses that emphasize nuclear and alternative technologies, such as wind power.
- FedEx (FDX). Global competitors such as United Parcel Service (UPS) have caught up with FedEx, and smaller niche competitors have taken a leaf from the company's book by adding technology to match its logistics capacity.
- Southwest Airlines (LUV). The low-cost, short-haul model that Southwest pioneered has been adopted so widely that it's not enough of a competitive advantage to justify keeping the stock in this portfolio.
- Walgreen (WAG). In response to fierce competition, the company has moved away from its core competency of running the best drugstores in the best locations to pursue a strategy built on acquisitions in the pharmacy-services sector.
Five to AddTo balance these five drops, I'm adding Gilead Sciences, as noted above, and:
- Accor, the leader in the international budget-hotel segment.
- EMC (EMC), the best in the storage industry at integrating hardware and software.
- FPL Group (FPL), the leader in the unregulated business of generating electricity from wind in the U.S.
- Nvidia (NVDA), the last independent graphics-processor company standing.
|Adobe Systems |
|General Cable |
|News Corp. |
|American Express |
|Taiwan Semiconductor |
|Texas Instruments |
|Applied Materials |
|FPL Group |
|Procter & Gamble |
|Valero Energy |
|Johnson & Johnson |
|Gilead Sciences |
|Rio Tinto |
|Washington Post |
|Exxon Mobil |
|Smithfield Foods |
|Whole Foods |