In 1989, Peter Lynch referred to Colgate-Palmolive as a stalwart stock, and quipped: “How much can you expect to squeeze out of Colgate-Palmolive? You aren’t going to become a millionaire off it. . .unless there is some startling new development you would have heard about by now. With the stalwarts you have to consider taking profits more readily.”
Incidentally, the beginning of January 2014 marked the moment when a $20,000 investment in Colgate-Palmolive would have become worth over $1,000,000 had it been purchased at the moment when Lynch said that in the summer of 1989.
With blue-chip stocks, there is this constant underestimation that the glory days are over because there is simply nowhere else to go. This kind of logic ignores the potential for acquisitions, technology gains/productivity gains, price increases at rates greater than inflation, and enduring buyback programs with the excess free cash flow.
With the Coca-Colas, Johnson & Johnsons, and Colgate-Palmolives of the world, Peter Lynch recommends selling after a 30% to 50% gain. It’s hard to argue with a guy that compounded wealth at a rate of 29% annually from 1977 to 1990, so I’ll just say this: holding on indefinitely does not carry with it the adverse consequences that some imagine.
The key determination for me is to look at the underlying strength of the “profit engine” inside of the corporation. With Colgate-Palmolive and Coca-Cola, the engine for growth is set up to be 8-12% annually for the long term. That is why I write about them all the time. With other excellent companies like Campbell Soup and American States Water, the current economic engine inside the company only brings about 4-7% annual growth. That’s why I do not discuss them with the same frequency; the quality is there, but the growth is not.
Peter Lynch was famous for talking about his “tenbagger” stocks, meaning investments that increased tenfold from $10,000 to $100,000 or whatever the amount may be. Trying to do that over a five to ten year period of time is hard and requires balance-sheet reading skill that would have to put you in the top 0.01% of investors out there.
It’s crazy to think that Colgate-Palmolive—dish soap and toothpaste!—has been a fifty-bagger over the past twenty-five years. And that you required that you only do three things: (1) come up with some money to invest, (2) be patient, (3) and stay alive. All it takes is the ability to expand the time zone over which you need your money. If you frantically need to double or triple your money over a five to ten year stretch, then you have to increase your risk by buying things that have a lower probability of success. But if you are willing to wait fifteen to twenty-five years, then you can get your probabilities in the 80-90% range and stick with the McCormicks, ExxonMobils, Colgate-Palmolives, and Brown-Formans of the world.
Originally posted 2014-01-16 07:52:45.