Why boring can be brilliant
Just because you're seeking above-market returns doesn't mean you should completely ignore the stock market's plodders.
Our base case is that, over the next five years, we expect the stock to produce high single-digit to low double-digit returns. Perhaps up to half the return might come from dividends.
You could almost hear members snoring from our Sydney offices – nine floors up. The company hasn't found a cure for cancer, nor is it developing some amazing new battery storage technology. Its brands, however, are some of Australia's most memorable.
Intelligent Investor's analysts weren't thrilled either. Few would admit to targeting returns of ‘only' 10% in their own portfolios. If we can't beat the market, what are we doing with our time?
To make matters worse, this company's share price has gone nowhere for five years now. That it looks to have made a big mistake with an acquisition a few years back certainly isn't helping sentiment either.
Boring over buzz
Therein lies the opportunity. The stock we've upgraded is a somewhat dull company that's lost a bit of gloss. But when it comes to investing ‘boring' often outshines ‘buzz'.
So why might you be content with a total return of only 10% in a stock like this?
First of all, you don't need to aim high with each and every stock. Keep most of your capital in good, solid businesses that will produce reasonable returns without undue risk.
With the remainder you can go for higher returning, higher risk stocks to ‘juice up' the total return from your portfolio. Or wait for the market to serve up the really underpriced opportunities (which are much rarer).
Second, it pays to be realistic about the returns you're likely to achieve. Ten per cent really isn't that bad, particularly in the current interest rate environment, even if many of us aim for better. If you're aiming much higher you might be taking on a lot more risk.
Third, good things happen to great businesses. While we're targeting 10% returns – or thereabouts – over time, there's some chance the stock will do significantly better. (Of course, there's also a chance it will do somewhat worse.)
I'm often surprised how well-managed, low-risk businesses can produce above-market returns when expectations are already pretty low. Management is aiming to lift growth over time, but it's still being priced as a plodder.
I'll admit there was a time when I wouldn't have bought a company like this. But I'm now much more risk-averse and patient than a decade ago (see Lessons from the past two-and-a-bit years).
My experience is that you can make very decent returns from large companies that might seem like they're low growth at the time. What's more, you can do it with a lot less risk and volatility.
That's why I'm now a big supporter of boring stocks. Indeed, they're the foundation upon which you can build above-average returns. Make them the bedrock of your portfolio.
Intelligent Investor is loading up the van and going on tour in April and May, with events on the QLD mid-north coast and in Brisbane, Perth, Adelaide, Melbourne, Sydney and Canberra. If you'd like to hear us talk about building a portfolio to weather any storm, book your spot here.
Disclosure: The author has bought shares in the upgraded stock. It's his first new purchase since June last year (although he has added to existing holdings since then).
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