There Are No “Forever Stocks”

Investing is becoming increasingly dominated by passive index investing, where people buy dirt-cheap mutual funds that basically try to represent the whole stock market rather than tie up all their risk and reward in a handful of stocks. People are getting the message that it doesn’t really pay to “play” the stock market.

But, still… who doesn’t fantasize about striking gold by buying a ton of AAPL stock in the late 1990s, or buying a boatload of GOOG in 2004? Those individual stocks have skyrocketed in value over the years and you would have been handsomely rewarded for your investment. The problem is always that hindsight is 20/20, and it’s impossible to really know ahead of time which stocks are going to increase in value (unless you can steal an almanac from the future). There are people who dedicate their entire careers to this endeavor, using fancy algorithms and advanced research, and still can’t reliably beat the overall stock market, on average, over a long time frame.

Finding the right individual stocks to buy and hold over time to become wealthy is a perennial obsession. The problem is that, even among the most famous examples of successful companies, there are no “forever stocks” that are guaranteed to perform in perpetuity.

Take at look at this article from the year 2000 that discusses “stocks you wish your granddad had stashed away”, and basically attempts to make the argument that some companies just have the fundamentals for sustained growth, making them good picks to own permanently. Let’s look at the performance of some of these “forever stocks” singled out in that article since the article was published. Some don’t seem so “forever”:

General Electric

Xerox
Xerox

 

Cisco (you’d really be sorry if you went out and invested heavily in this single stock when that article was published on Jan 3, 2000)
Cisco

Other “forever stocks” identified in the article have been more successful:

Coca-Cola
CocaCola

 

The problem is that picking a “forever stock” to invest in is, like all stock picking, essentially gambling. Sure, it’s “educated” gambling because these companies publish troves of information about their financial health. But are you really qualified or “educated” enough to risk your future livelihood on this decision? Remember that even the most sophisticated hedge fund stock pickers can’t beat a monkey throwing darts over the long run. Unless you’re Warren Buffet, you probably don’t have The Touch to reliably predict a companies future performance. We’ve seen that the vast majority of individual stocks fail to beat the market average, and most of the growth in the market comes from a handful of overachievers. Are you sure you know how to spot those overachievers ahead of time?

I’ll leave you with this: overall performance of the Russell 2000, a broad index of most of the growth stocks in the market:

Market

On average, the entire market trends relentlessly upwards. Index funds which track the entire market are a nice way to guarantee that you’ll capture the return of the that market. Now you don’t need to guess which company will take off and drive the entire market upwards. Invest in broadly diversified index funds tracking an index like the S&P 500 or even the the total US stock market, and you’ll be guaranteed to invest in the next big thing, because you’ll automatically be invested in the whole stock market.

 

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