Monday, August 10, 2020

Picking 10 Companies to Hold for 10 Years - Part 1: Criteria

Since I haven’t written much this year, I thought I’d try something different this week and expand on a fun thought experiment suggested on Twitter by Dividend Growth Investor in late July. As per the screenshot below, DGI asked which five companies you would be willing to hold for the next ten years. Not being one to play according to the rules, I decided to reply with both my Canadian and U.S. picks.


Today, I wanted to break down the criteria I thought were worth considering when making my picks. Not to say that all of my picks adhere to all these criteria, but only that it’s important to establish a framework when making any investment decision. Here’s an overview of the criteria I had in  mind while tweeting my response:


Dividend Yield & Dividend Growth: Given how much credence I put into dividend yield and growth in my investment process, I thought this was an obvious starting point to consider evaluating any company for investment.


Current Ownership: I’m a fan of Nassim Taleb’s writing and one of his most influential books on me was Skin in the Game. Additionally, by limiting myself to companies I already own (or are high up on my watchlist), I shrink the universe of possible picks down to a more manageable number of businesses.


Established Track Record: It’s probably my pessimistic side that severely limits my ability to pick high growth companies in which to invest. To counteract this weakness, I choose to invest in established companies that have a history of generating sufficient profits over a long period of time that enable management to reward shareholders with dividend payments and hopefully increases.


Reasonable Valuation: With one possible exception, all of my picks are pretty reasonably valued. I do think several of the businesses I have selected are trading at a slight premium to fair values, but I’m alright with paying that premium given the low-interest rate environment in which we find ourselves.


Diversification: Granted, I cheated by doubling the number of companies I was allowed to pick, but diversification by industry and geographic focus were considerations for my picks. For instance, the number of global healthcare companies listed in Canada is limited to Bausch Health (formerly Valeant), which has nowhere close the global reach and importance than Johnson and Johnson.


Momentum: Largely as a result of recently finishing Daniel Crosby’s The Behavioral Investor, I’ve been thinking more about momentum as a factor in my investment process. Although exceptions abound, I generally think stocks that have trended upwards in the last the last year will continue to do so, barring any unforeseen obstacles.


Tomorrow, using the criteria established above, I’ll provide a breakdown of why I chose the five Canadian companies to hold for the next ten years.


Are there obvious criteria that I missed when making my selections???

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