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Here are two of investing's most ancient bits of advice:
- Invest for the long term.
- Diversify broadly because picking individual stocks is hard.
Both those commandments are sound, yet we all tend to violate them, especially the second one. Holding onto stocks, in accord with commandment No. 1 -- that's easy (sometimes all too easy). But passing up a really alluring individual stock, as commandment No. 2 requires? That's hard. If you need inspiration to get back in line and do what's good for you, take a look at some fascinating information I've just been studying.
At FORTUNE magazine we recently published the 50th edition of our FORTUNE 500 directory. Now you might suppose that the FORTUNE 500, being the very biggest companies in all the land, would be a fairly stable group. These, after all, are the titans of American industry, the companies that by definition have made it through all kinds of storm and trouble to become the giants that rule the business world.
Yet the list is not at all stable. In July of 1955, as you sat reading that first 500 directory, you would have surveyed the top 20 companies with a feeling of comfort and confidence that these stalwart enterprises would proceed majestically into the future as far as the eye could see. But of course they didn't. U.S. Steel was No. 3; today it's a small-cap value stock. Chrysler was No. 6; now it's part of DaimlerChrysler, a German company. Bethlehem Steel was No. 12; last year it finally disappeared completely.
In all, 13 of those top 20 companies are no longer in the FORTUNE 500 for one reason or another. Looking at the entire original FORTUNE 500, only 71 of those companies are still on the list.
So here's a challenge we don't often think of when trying to pick individual stocks while investing for the long term: An awful lot of stocks don't even exist for the long term. Of course some of them get bought by other companies, so your investment simply adopts a new name. Mobil (No. 9 on the original list) is now part of ExxonMobil, which is No. 2. CBS (No. 13 on the original list) is part of Viacom, No. 64. But plenty of others just fade away.
Now suppose that by some incredible stroke of luck you were visited, in your 1955 easy chair, by the ghost of FORTUNES future, who vouchsafed to you the exact list of the 71 companies that would remain on the FORTUNE 500 for the next 50 years. If you were still having trouble with the second commandment and insisting you could pick individual stocks, you would figure you had it made now -- all you'd have to do is choose the big winners from a group that was guaranteed to survive 50 years. Now: Whom would you have picked?
I can tell you right now that among those 71 survivors, one company turned out to be the best 50-year investment by a mile, trouncing all the others with ease. Can you guess who it is? Remember, this is not a close call. More important, could you have picked it back then? Would you have looked past all the largest members of that club of companies that would survive -- GM, GE, DuPont -- and moved way down the list to No. 218 on the original 500 as the company that would beat all the others as an investment?
For that was it. No. 218 was then known as Philip Morris (now it's Altria, No. 15 on the latest 500), and that's where you would have wanted to put your money in 1955. And no, there's no reason in the world to think you would have picked it.
Nowadays a 50-year perspective seems extremely long term, but let's go much further. How about a 200-year perspective? That's the view taken by Jeremy Siegel, the Wharton professor who wrote Stocks for the Long Run (see the box on the right for his appearances on Wall $treet Week with FORTUNE). He performed a ground-breaking analysis of total returns to various investments from 1801 to 2001, and the results show that if you could have followed commandment No. 1, investing for the long term, then you would have done fabulously by following commandment No. 2, not picking individual stocks.
Suppose, he says, you had invested a single dollar in various types of assets in 1801. By 2001, your $1 invested in gold would have been worth $14.38, almost perfectly matching inflation. In real terms, you would have gained nothing. Your $1 invested in bonds would have been worth $13,975, which seems like a huge return. But your $1 invested in stocks -- that is, invested in all the stocks in America -- would have been worth $8.8 million. It's obvious how he chose his book's title.
Most of what we hear and read about stocks concerns this quarter or this year. So it's useful to stop and think about the long term -- the truly long term. Ask yourself, and try to answer honestly, these questions:
- Do you really invest for the long term?
- Are you invested mostly in a small number of individual stocks?
- If so, how confident are you that you've picked the long-term winners?
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