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Death! Gold! Excitement! Calm Down and Get Boring if You Want to Get Rich

Jason is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Death! Long-term Investing is Dead!

Jake Zamansky, contributor to Forbes, recently wrote, describing long-term buy-and-hold investors: 

"Such investors are sitting ducks for the new breed of “high frequency” traders, the nefarious “dark pools” and Wall Street firms who use retail investors as dumping grounds for their dubious products and shares."

Once upon a time, it was the norm to buy and hold shares for years, even decades.  In the 1960s the average holding was around 8 years.  Today, it's less than a year.  And while the advent of computer trading algorithms that sell and buy millions of shares based on very small price changes has certainly skewed the numbers, the individual investor, with an online trading account and trading fees below $10 -- us "sitting duck" retail investors -- are also trading more often and holding for shorter periods. 

But why is that? The data still indicates that, when held for long periods, stocks remain the best way to grow your wealth:

<img src="http://media.ycharts.com/charts/670681ca3472119f4086b37350aa5830.png" />

Dow Jones Industrial Average data by YCharts

What does this chart tell us? First, it's pretty clear that bonds are not good places to grow wealth today, with current yields -- at best -- matching inflation. Not since the 1980s have bonds offered a strong yield. But there's a new game in town...

Gold! Stocks will Kill you!

Many investors have fled the market over the past five years, and gold has become a haven for many, especially with Gold ETFs like the SPDR Gold Shares (NYSEMKT: GLD) making it easy to even stick gold in your portfolio. But with only a limited amount of industrial use, and consumer demand for jewelry being steady at best, a vast amount of gold's current market value is based entirely on investor perception.  Think about these two quotes, from the World Gold Council. 

Under "Investment Demand":

"... Of the key drivers behind investor demand, one common thread emerges: all are rooted in gold's abilities to insure against instability and protect against risk. The positive price outlook is underpinned by expectations that growth in demand will continue to outstrip that of supply. In turn, positive price expectations themselves have become a driver of further investment demand in gold."

So it's about stability. And the price increase, is, quite frankly, a product of the price increase. It's like a snake eating its own tail.  There's more, under "Supply" (bold italics mine):

"Today, the overall level of global mine production is relatively stable."

So the price of gold has skyrocketed in the past half decade, while production has remained stable.  In a nutshell, all of the increased demand, and therefore increase in price, has been created by investors, not actual consumer or industrial demand. 

Does that sound like a smart long-term investment? Doesn't anyone remember the tech bubble? Expecting the price of gold to be sustained, much less continue to grow, without a similar growth in consumer or industrial demand is a fool's errand.  Write that down. 

Let's take a look at the same chart as above, measured as a percentage of change:

<img src="http://media.ycharts.com/charts/4067ce70db5f05a68dfe2ff44449776a.png" />

Dow Jones Industrial Average data by YCharts

Even when factoring in the increase in gold prices of the past few years, 3 decades of evidence shows that stocks continue to be the best wealth-creating tool at the disposal of the individual investor. 

But what about your Opening Line? 

Jake Zamansky, whom I quoted above, completely ignores what works about long-term investing.  But the reason that I quoted his article is simple:

His comments evoke powerful human emotions.  Words like "death," "nefarious," "dubious products."  It's enough to make even a stout-hearted investor give up.  Except that he misses the point, and unfortunately, so do we most of the time.  We make investing an emotional game, a game of chance, having to make the big risk to get the big reward. 

But that's just not the case. 

As I wrote here last week, Wall Street isn't really our opponent.  We are our own worst enemy when it comes to investing success, and we can make better choices -- ones that we can stick to long-term and get the gains we want. Frankly, if there's anything the advent of computer trading should make abundantly clear, it's that the increased volatility in the markets make it that much more important that we be invested for the long-term. Anything else is just a guess. 

Okay, I get it.  Any suggestions?

Of course! But I want to stress that, just as my success and failure as an investor is all my own, you need to take responsibility for yours. Take the following ideas and then do your own research and due diligence, and give your investments time to work.  To quote Benjamin Graham, "In the short-term the market is a voting machine. In the long-term, a weighing machine." Before I get into specifics, let's discuss what makes these companies good long-term holdings: 

Boring Stocks will get you There, too.  And you'll Sleep Better. 

Yes, that's right. My anecdotal observation is that most investor dollars are lost in highly volatile stocks, both through realized losses when we sell on price drops, and in the additional trading fees all that extra trading costs us.  It's like trying to crush the golf ball over a water hazard, and instead hooking it into the woods.  Yet the 80-year-old guy in front of us is taking his time, and making short, safe shots all day long.  You'll both get to the 18th hole, but chances are his patience and skill got him there in fewer shots.  Oh, and at $7 a ball, he didn't throw money away on those risky shots like you did.  Maybe he'll buy you a beer. 

High-risk investments can pay off, but we have to stay the course, and the reality is that most of us don't have the stomach for that kind of investing.  The truth is it takes a lot of high-risk investments to get a few that pan out.  Most of us are better off taking measured, conservative shots that keep us out of the tall grass. 

Berkshire Hathaway (NYSE: BRK-B) is one of the most recognizable names in the world, yet I think many investors still miss out on this company, choosing not to invest because maybe the best days are behind it. It's like saying "If I can't have a Ferrari, I'll just walk." Get over yourself. 

Check out this link. That's a powerful list of brands, all under the Berkshire umbrella. I can't think of a company that is more recession-proof, or more ready to capitalize when the housing market gets going again, not even factoring in the incredible investments that Warren Buffett has made, in the insurance business, investments that keep reloading his "elephant gun" so he can go bag another undervalued business.  

Did you know that Waste Management (NYSE: WM) is the largest recycler in the United States?  Did you know that the company is working toward powering its entire trucking fleet with natural gas? Did you know that it's producing the gas from its own landfills? How's that for adding value? Throw in a 4% dividend yield and a P/E under 17, and this is an undervalued stock with limited downside risk. What?  Are we Americans just gonna stop throwing stuff out? 

Brookfield Infrastructure Partners (NYSE: BIP). I know what you're thinking.  How's a stock with a P/E around 60, and enough volatility to have increased over 30% in the past year a boring stock? You're setting me up to get crushed by momentum! Not exactly. From the company's website:

"...operates high quality, long-life assets that generate stable cash flows, require relatively minimal maintenance capital expenditures and, by virtue of barriers to entry and other characteristics, tend to appreciate in value over time."

Think forests, pipelines, ports, and railroads. Oh, and don't forget about the power lines and coal terminals. Don't fall asleep clicking the "buy" button. Seriously, this is a company that is involved in boring-yet-necessary businesses, that over time will continue to grow in value. 

Starbucks (NASDAQ: SBUX) may be the McDonald's for this generation of investors. While it is an established brand, the company has opened less than half of the planned total locations. Factor in the additions of La Boulange Bakery, Evolution Fresh, and the Verismo home espresso-maker, and the Starbucks coffee shops are just part of the story. Truly a great brand with great upside. 

It's investments like these that grow wealth, and all have rewarded me with positive gains. But most importantly, there isn't anything about any of these companies that keeps me up at night, or gives me urges to check my portfolio to make sure that they haven't tanked. I know I can count on all of them to grow over time, in the case of Brookfield and Waste Management, behind the scenes, and for Starbucks, hiding in plain sight. 

Now get out there and do your own homework. Are these the right "boring" stocks for your portfolio? It's up to you to decide. 

elihpaudio owns shares of Brookfield Infrastructure Partners, Berkshire Hathaway, Starbucks, and Waste Management. The Motley Fool owns shares of Brookfield Infrastructure Partners, Berkshire Hathaway, Starbucks, and Waste Management and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Brookfield Infrastructure Partners, Berkshire Hathaway, Starbucks, and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.

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