Among the readers with whom I have had private conversations, the biggest investing regrets have generally been one of two things:
(1) Either the person invested extensively in bank stocks prior to the financial crisis of 2008-2009 that wiped out 75-95% of the value of many supposedly safe financial stocks, or:
(2) They owned some high-quality stocks that they had to sell to meet an inevitable need that crops up over the course of an investing lifetime.
It is the second point that I want to discuss.
Successful investing over the long-term, defined as regularly increasing your purchasing power over most rolling three-year periods, is quite easy. If you figure inflation is going to run somewhere around 4% annually over the next fifteen years and you had to make a list of twenty companies that have a very good chance of increasing profits by more than 4% annually over the next fifteen years, you could probably do it without stretching too many brain muscles.
The difficulty, though, is not necessarily identifying those companies, but rather, in avoiding situations that would lead to selling them prematurely (maybe the stock price declines too far too fast, maybe the stock price does not appreciate enough, and/or maybe a living expense shows up that demands you sell).
In these situations, the most important character trait to possess is an inner Calvin Coolidge. In such a situation, you would need to prioritize persistence as the most important character trait in your arsenal:
“Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On’ has solved and always will solve the problems of the human race.”
In terms of logistics, I would think of it like this: you make five investments of $10,000 or so in the most dominant enterprises on the planet you can find. Some candidates for consideration might be: Nestle, Coca-Cola, Johnson & Johnson, Procter & Gamble, ExxonMobil, Colgate-Palmolive, Chevron, General Mills, Disney, or PepsiCo. But the point is that you make a personal judgment call about the absolute highest five or so companies you can find, and then acquire meaningful stakes in them.
Now here is the hard part: once you have $10,000 worth of Coca-Cola, $10,000 worth of ExxonMobil, $10,000 worth of Procter & Gamble, $10,000 worth of Johnson & Johnson, and $10,000 worth of Colgate-Palmolive, you have to put them in the vault, automatically reinvest the dividends, and pretend they do not exist. This is your private pension. This is your fallback money. These are the dividends that will provide for you in old age. If you can give each of these companies more than 20 years to compound, holy cow, you’re going to be in great shape. If you need to touch the money before then, well, you should take what you can get—growth is growth, and increases in purchasing power is nothing to sneeze at.
The rest of your portfolio should also be somewhat untouchable, with the understanding that you will try to build a cash cushion so that it, too, can grow undisturbed. However, if “life happens” and you cannot avoid selling, well hey—you still have those five untouchables in your portfolio that will be growing undisturbed.
Even though you would legally be allowed to sell those five companies, you need to create the mental fiction that they act as a private pension for you. In much the same way that you cannot prematurely start taking assets from a real pension, you must not even thinking of Coca-Cola, ExxonMobil, Procter & Gamble, Johnson & Johnson, and Colgate-Palmolive as assets that you could consider selling. They exist to provide you money in old age, and you must pretend that the money is not there, lest you want to stick a middle finger up at your future self.
The harder you make it to sell these shares, the better off you will be. I inadvertently locked some Bank of America shares in stock certificate form in a state that I will not be visiting anytime soon. Guess what—that forces me to be a long-term shareholder because I would have to: drive for hours on end to get the stock certificates, mail them into a custodian, and then give them instructions to sell. If I went through the natural process and did not pay any “speed up” fees, the process would likely take an entire month from the time I decided to sell until the money hit my bank account. When you create those kinds of impediments, you cannot help but position yourself to be a long-term investor. With your life, you need to hitch your fortune to the absolute best businesses you can find, and then put the safeguards in place to make sure that you never sell them.
In thirty years, you want to put yourself in a position that you wish you could go back in time and hug a younger version of yourself for his foresight in delaying gratification, rather than desiring to punch him for his stupidity in selling just because a bump along life’s road cropped up.