Last week, I talked about the dangerous investing world we are currently in and some of the reasons we find ourselves navigating this landscape right now. I have always believed, and continue to do so, that long-term shareholder dedication is an idea that has stood the test of time.
Why? Because it not only does our long-term investment reap rewards over time, history continues to prove the theory. The historical record of numerous companies shows us time and again that the best way to capture significant long-term returns is not only to accept but endure any momentary volatility and declining stock values. After all, high-quality, stable companies withstand the test of time because they adapt and innovate rather than become obsolete because they know that their choices are slim without a strong stock price. They know that if their stock price goes down, they are doing something wrong and need to change what they are doing, or they will fail. Seems rather logical, doesn’t it?
Let’s look at the S&P 500 to help illustrate the simple logic in this and the benefits of failed companies. That’s right - benefits of failing - for investors, that is. The S&P 500 has 500 seemingly random companies in it. Over time, some of these companies fail or fall below the threshold requirements for inclusion in the index. This is actually a good thing because it makes room for other strong, stable, and high-quality companies to gain exposure and become included in the index. This is the beauty of large, cap-weighted equity indexes.
To break it down even further, here is an example of one of those companies. And this is just an example, not my recommendation for investing, simply the tale of one company. Insulet is a company in Acton, Massachusetts, that makes unique and innovative medical devices for those with diabetes. In 2022, its revenues were $1.3 billion, yet it wasn’t in the S&P 500.1 What was in the S&P 500 was Silicon Valley Bank, and they weren’t doing well. Last year, the S&P removed the bank and added the medical device company, and we all know what happened just a few months later. This kind of “index renewal,” if you will, goes on all the time, and it is one of the most underappreciated qualities of large, cap-weighted indexes.
This brings me back to my initial point, the importance of rational, well-run businesses that earn consistent long-term returns as the foundational element of a strong portfolio. Over time, these businesses continually demonstrate their ability to innovate, survive, and thrive in the face of whatever crisis du jour we happen to be bombarded with. (This is my thinly veiled jab at the media.) A portfolio with these companies as its backbone shows consistent historical strength and is typically able to withstand the stock market's short- to intermediate-term ornery behavior, making it a reliable way to capture superior long-term returns.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
Sources:
1 Bloomberg. Past performance does not indicate future success.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.