10 stocks to last the decade

In August 2000, Fortune ran an article titled “10 Stocks to Last the Decade.” The author’s intention was clear, as captured in a short description preceding the article: “A few major trends will likely shape the next 10 years. Here's a buy-and-forget portfolio to capitalize on them.”

Well, we have more than 15 years behind us. Let’s look back and see how the picks held up over time. Let’s also see if we can spot any trends that should have caught the reader’s eye.

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The 10 stocks are Nokia, Nortel, Enron, Oracle, Broadcom, Viacom, Unvision, Charles Schwab, Morgan Stanley, Genentech.

Here's the conclusion of the article:

After 15 years, here’s the final result: a handful of winners, a handful of laggards and some serious disasters. You lost most – if not all – of your investment on half of the positions. By comparison, the S&P 500 has increased by ~65% (cumulative) since the article was written.

What’s most interesting to me is what we can learn from the losers: Without fail, these were the companies that were part of the “sweeping trends that have the potential to transform the economy.” They had grown like crazy in recent years; analysts and investors expected the good times to continue in perpetuity. Their valuations required perfection – and in some cases, even more. The author stepped to the plate in search of riches. In reaching for home runs, investors ended up with a number of devastating strikeouts. The subsequent experience of investors in these 10 companies – especially those with the potential to transform the economy and the world as we know it – offers an important lesson that shouldn’t be forgotten.

[see also Ten Stocks for the Next Ten Years]

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What about my top 10?  Well, I didn't have exactly have a top 10, but I had a 20 Punch Portfolio that I wrote up in August 2004.  I wonder how they have done since.  That's about 13 years ago, but for convenience, I'll just use Morningstar's 10 and 15 year returns.  For comparison, the S&P 500 has returned 7.06% and 7.67%.

1.  BRK.B  8.51%   8.18%
2.  WSC    bought out by Berkshire Hathaway
3.  MKL    7.07%  10.86%
4.  DHR   11.60%  12.80%
5.  WMT    7.16%   3.75%
6.  COST  13.95%  11.88%
7.  KSS   -4.12%  -3.03%
8.  BBBY  -1.39%   0.04%
9.  ORLY  21.10%  20.04%
10. HD    16.05%   9.58%
11. LOW   10.57%   9.05%
12. FAST   9.29%  11.52%
13. EBAY   8.32%  11.43%
14. RPM   10.85%   9.58%
15. CSL    9.71%  12.40%
16. ACS   bought out by Xerox (-8.27%, -0.96%)
17. DELL  went private
18. APPB  went private
19. EAT    3.97%   5.17%
20. JNJ    9.13%   6.47%

I still own 15 out of the 20.  Gone are WSC, CSL, ACS, DELL, APPB.  The only one I actually sold was CSL (mistake).  Out of those 15, 10 have outperformed the S&P for 15 years.

What about my other top holdings?  Let's see, stocks not listed above that are currently in my top 20 are MSFT, AAPL, UNH, ROST, CSCO, WBA, ORCL, AMZN, PG, PYPL, CHKP, INTC, BABA.   (The Punch stocks that are in my current top 20 are BRK.B (and A), MKL, COST, ORLY, HD, LOW, JNJ.  And I guess you could sort of count EBAY since it split up into EBAY and PYPL.  DHR would be there too, but it spun off FTV.)  How have they done?

MSFT   9.97%  7.89%
AAPL  25.97% 35.13% (sheesh)
UNH   13.12% 15.29%
ROST  23.24% 18.54%
CSCO   3.44%  5.27%
WBA    7.26%  6.06%
ORCL   9.73% 12.04%
AMZN  30.68% 29.99% (another sheesh)
PG     5.64%  6.40%
PYPL    N/A    N/A
CHKP  16.91% 12.91%
INTC   7.15%  3.12%
GOOGL 12.40%   N/A
BABA    N/A    N/A

Out of the 11 stocks above that have a track record, 7 have beaten the S&P 500.  Out of the top 10 stocks in my portfolio (BRK, MSFT, AAPL, UNH, JNJ, HD, ROST, CSCO, MKL, LOW), 2 have underperformed the market (JNJ and CSCO).  I don't have any plans to sell out any of my top 20 stocks, though I might trim here and there.  Of those remaining on my 20 Punch list, KSS is the shakiest.

(Alphabet would replace BABA in my top 20, if you combine the A and C shares.  So I revised the list above.)

the stock market and Watergate

Stocks are enduring their worst stretch of 2017 as Washington is in the grips of yet another scandal that requires a special prosecutor.

The Dow Jones industrial average tanked more than 370 points Wednesday on news reports that President Trump allegedly asked now-former FBI director James Comey to end the bureau’s investigation into former National Security Adviser Michael Flynn and his possible ties to Russian influence.

Those reports - and Trump’s firing of Comey last week - sparked an immediate debate about whether the president may have obstructed justice as the FBI investigates whether Russia tried to interfere with the U.S. presidential elections.

The Justice Department has now appointed former FBI Director Robert Mueller as a special prosecutor to investigate whether there was any coordination between Russian officials and Trump campaign associates to interfere in the 2016 elections.

For investors, there are two immediate fears: At the very least, this scandal is sucking all the oxygen out of Washington, making it that much harder for the Trump administration to push its agenda for cutting taxes and stimulating growth through infrastructure spending.

The "markets had risen on the expectation of tax and health reform along with an infrastructure spending plan, but the constant string of high profile distractions involving the president or members of his administration has put all that into jeopardy," said Tom Siomades, head of the Investment Consulting Group of Hartford Funds.

What’s more, many "worry that the market will react negatively to the firing of FBI Director Comey, as it did following President Nixon’s firing of Archibald Cox, the Watergate special prosecutor, in October 1973," notes Sam Stovall, chief investment strategist for CFRA.

"Investors are now concerned that President Trump will be impeached and are looking warily at historical precedent," Stovall noted.

What does that history show?

Constitutional crises are never good for the stock market. During the Watergate scandal, when Cox was fired and then-Attorney General Elliot Richardson resigned in protest - the S&P 500 fell 14% from October 1st through November.

But investors shouldn’t jump to conclusions. Nixon’s so-called Saturday Night Massacre took place while Wall Street was already mired in one of the worst bear markets in history. From January 1973 through August 1974 - a period that includes the conviction of the Watergate burglars, Nixon’s resignation, global oil shock, Middle East turmoil, and a dramatic spike in inflation - stocks lost 42% of their value.

"[T]he 1973-to-1974 slump seemed endless," Jason Zweig wrote in Money in 1997. "[I]n a crescendo of calamity, war broke out in the Mideast, oil prices quadrupled, Richard Nixon resigned over the Watergate scandal, and inflation hit an annual rate of 12.2%."

Today, Wall Street is in the midst of one of the second-longest bull markets ever. Inflation continues to be muted, and oil prices seem to have stabilized.

This doesn’t mean that the stock market is out of the woods just yet.

The S&P 500 fell nearly 20% in the weeks leading up to special prosecutor Kenneth Starr’s report on President Clinton, which ultimately resulted in Clinton’s impeachment. And that was in the late 1990s, when the stock market and economy were booming.

"However, after investors concluded that this event would not likely lead to recession, the [market] then went on to recover the entire decline and set a new all-time high" at the end of November, says Stovall, months before the Senate acquitted Clinton in February.

"This time around, while the current crisis may trigger a correction, we do not think it will lead to recession and therefore will not result in a new bear market."

Still, that means a correction - defined as a loss of 10% to 20% of the stock market’s value - could be lurking around the corner, depending on what the special prosecutor finds.

Chuck Carnavale's investment lesson

The theme of this article is to share what I consider to be the most important stock investment lesson I ever learned. This important lesson is supported by virtually every master investor I have learned to respect and admire. This lesson was also emphatically taught to me in the school of hard knocks, but my motivation to write this is born from the realization that very few “investors” are able to implement this lesson in real-world situations.

From a broad or general perspective, this investment lesson is simply to apply the discipline to only take investment advice from credible sources. Unfortunately, it has been my experience that most investors are keen to get their investment advice from pathological liars. Obviously, pathological liars are not a reliable source.

More specifically, this important investment lesson is: do not base investment decisions on stocks based on short-term price volatility. Truly aware investors recognize and accept the reality that stock price movements can be, and often are, irrational in the short run.

The key is to think and act like a business owner when you purchase a stock. When people invest in or start a new business, they are not thinking about selling in the next day, month or even year. Instead, they are thinking about owning and running the businesses for years to come. Of course, if the businesses are privately held, there is also the benefit that no one is continuously shoving purchase quotes in their faces either.

It’s critical to understand and remember that short-term price volatility is not always rational and certainly not always fundamentally based. Instead, short-term price volatility is more often than not emotionally charged. Consequently, a rising stock price is not always indicative of a good company, but sometimes it can be. Conversely, a falling stock price is not always indicative of a bad company, but sometimes it can be.

The secret is to have a realistic assessment of the true value of the business you own, and make your buy, sell or hold decisions accordingly. The primary point is to focus your attention on how you think the business will perform going forward.

In the long run, stock price will inevitably relate to business results. In the short run, fear or greed can drive the price up or down unjustifiably. And most importantly, short-term price aberrations are totally unpredictable. Therefore, you cannot, and I argue should not, place too much importance on them.

In the long run, stock prices will correlate very closely to the success of the business behind the stock. Therefore, if you are a prudent long-term oriented investor, it only makes sense to focus more on business results (fundamentals) than it does short-term price action. The reason I consider this the most important stock lesson I ever learned is because it allows me to make rational decisions in the face of emotionally charged periods of time.