This article is authored by MOI Global instructor Bogumil Baranowski, founding partner at Sicart Associates, based in New York.
Bogumil is an instructor at Best Ideas 2024.
Beyond temperament, investing is a lot about filters and mental models. A question I pondered this year would be a good example — if you could pick 20 stocks to hold for 20 years, what would you pick? You might think of the big and older brands and well-established businesses that stood the test of time because they might still be around in 20 years. It’s an intriguing strategy, but it is not exactly the question I had in mind. Let me explain.
A Mysterious Story of an Old Portfolio
I regularly review the accounts I manage, but recently, something really stood out. A smaller subset of stocks did all the heavy lifting, especially when I looked back at the last 5-10 or even 20 years.
As much as most accounts have similarities, there is one that stands out from one particular perspective. It’s an account where I did less selling and more holding due to the client’s preference. I let the proverbial winners run. The phenomenon I noticed was even more visible there since the account saw a rise in position sizes in about 20 holdings out of 50 or so. It’s no surprise that some didn’t keep up with the rest, too.
20 stocks is an interesting count since it’s also the number of holdings where most of the individual stock risk gets diversified away. Studies show that for large caps, the number is 15, and for small caps, 26. A 20-stock portfolio is also concentrated enough that each holding has enough weight to matter, and make a hopefully positive contribution.
Infinite Horizon, Finite Assets
An infinite investment horizon is usually the preferred time frame for the clients I am privileged to serve. The last thing they ever want to risk is losing everything and starting from scratch again. At the same time, they would like to see their wealth grow at a respectable rate over time.
This infinite investment horizon faces a serious challenge. The assets we invest in are finite. Businesses don’t last forever; even if they survive longer than average, their glory years are counted.
How finite are their lives? Studies show that, on average, successful companies have about 20 years at their peak. As much as the big-picture investment horizon is infinite, the preferred holding period for many stocks might be as much or as little as two decades then.
Who Can Wait That Long?
A year ago, I wrote an essay about a stock for a grandchild. I explained how it’s someone who can wait that long for the investment to fully play out. It’s not the only candidate for this kind of investing, though. More broadly defined, it’s the future being. A grandchild, a nephew, a niece — yes, of course, but it can be you, the future self.
Anyone who experiences sudden wealth or wants to put their nest egg to work for the long run can think of a 20-year investment horizon and choose investments accordingly. It allows them to focus on everything else: work, career, and new ventures, while a certain portion of the capital continues to grow with that 20-year horizon.
What Kind of a Stock Deserves a 20-Year Wait?
Big brands and big well-established businesses of today may well be around 20 years from now. U.S. Steel is still with us over a century later. It was once the first billion-dollar company, but a quick math will reveal that it wasn’t necessarily a good place to grow or even preserve wealth.
I emphasize the word deserve. I’m looking for a business that will use those 20 years to truly impress us. It has the potential to grow many times over, expand margins, generate cash flows, and, most of all, reinvest back in the business at respectable rates.
It needs long-term thinkers at the helm and a long runway ahead so that time works in our favor. It has to be already publicly traded and with enough history to prove that it has a winning formula and favorable odds of future success.
Why Wait 20 Years?
The power of compounding becomes visible when we wait. With respectable returns and a sufficiently long timeframe, even smaller sums are bound to grow to meaningful amounts.
If you look out 20 years, it’s easier to capture those 10x-100x stocks that many studies have researched before. Great companies become even bigger and better, but they need time, and not just a few quarters, but decades.
Finally, the 20-year time frame allows us to have a more relaxed attitude to any short-term market fluctuations, economic cycles, recessions, panics, and more. We keep asking if it’s something that matters if we are genuinely willing to wait that long.
20 stocks for 20 years is a thought experiment, a mental model, a helpful filter that I’ve been pondering for a while now. I notice how the moment you raise the bar and focus, the quality of the research and investment process rises, too. It’s also worth noting that with this approach, the competition for ideas might be slimmer than for a 3-5-year horizon and even more so than for 1-year or 1-quarter stock flipping contests.
I don’t imply here to pick 20 stocks and forget them; I think the world is subject to too much change to do that. Those holdings will require care and attention. Yet, if we intentionally look for those 20-year stocks, we are bound to come across some true long-term winners.
There will be lemons, there always are, but looking for stocks that deserve the wait for investors that are in a position to wait might be just the right mental model worth considering, especially if you are playing the long game, maybe even an infinite game.
The only immediate question that remains is, what’s a good example of such a stock?