Friday, March 16, 2007

Alternative investment strategy

Earlier, I recommended the best investment strategy is to go for value. Another investment strategy is much better than to invest in either the growth strategy or the plain-vanilla indices. That is even if you buy stocks at a very high valuation and if you hold it for a very long time, you can do better than either one of the other lesser strategies. But there is a catch here. This strategy is to only buy businesses which are the best in their class and has the most secured advantage whereby anyone who is given a billion dollar cannot hope to create much of a dent to the business. And the timeline for this strategy is almost for eternity.

Businesses which qualify under this strategy includes but not limited to are McDonalds, Wrigley, Pepsi, Coca Cola, Wal-Mart, Johnson & Johnson, P&G, Walgreens and the likes.

If you have bought Johnson & Johnson in 1992 at $13 with valuations of 37 times earnings, at the price today, the compounded return is 12%. For P&G in 2001, if you got at $33, the return is 13%. At Wal-Mart, at $11.50 in 1991, the return is 11%. At Walgreens, at $18.50 in 1998, it is 12%. At Dollar General which is lately being sought to be brought out by KKR, in 1994 at $4.30 for earnings of 24 times, before KKR offer, the return is 12%, after KKR offer, the return stands at 14%.

One thing is clear here, this strategy of buying the best businesses can give better return than growth or indices. But it is still not the best yet. The best strategy is to buy the best business when the price is at a cheap valuation – meaning when investors do not value the earnings of the business by as many times.

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