As an investor with a long-term mindset, I think of a Stocks and Shares ISA in terms of years not months. That has some implications for how I go about choosing shares to buy in it.
Fade out fads
Some businesses do very well while their product or service matches a short-lived fashion. But that is not the basis I would want for a long-term investment case.
How can I decide what might turn out to be a short-term fad, versus the start of a long-term trend? There is no easy way to tell, in my view, but a company with a single business line that seems very on-trend now strikes me as more likely to end up looking like a fad than a business that has a variety of revenue streams.
Think about the future world
The world 10 years from now will likely seem different in some ways, but reassuringly familiar in others. I think some business areas will remain in high demand, from network operators such as National Grid to retailers like Tesco.
I think some businesses may need to change themselves to stay relevant but have a strong base on which to build. For example, shifts in homeware trends could hurt Dunelm – but they could also provide an opportunity.
Meanwhile, other areas could see demand declines. That is one concern I have about tobacco shares like British American Tobacco.
I cannot future-proof my portfolio, as no one knows what will happen in coming years. Even if I am right about a broad business area, for example, maybe I will be wrong about a particular company within that area. But what I can do is try to increase my margin of safety. If I think one business area is very likely to see sustained demand in a decade, that makes it more attractive for me to explore than a sector I think may lack staying power.
Focus on value, not just share price
Short-term swings in share price may come out in the wash over a longer investing time frame. Whether I buy a share now or next month for a few pennies less, might make little difference to my long-term returns if the business performs strongly enough.
That is why I look for businesses I think can create substantial value over the course of years. However, although share price is only one part of that it is still a part. So I cannot simply ignore it. No matter how good a company’s long-term prospects, its attractiveness for my Stocks and Shares ISA will be reduced if the share price looks too expensive to me. For example, I like the business model and competitive advantage of Dechra Pharmaceuticals. But it has a price-to-earnings ratio of 52. I think I can find better value for my Stocks and Shares ISA elsewhere.
Investing a Stocks and Shares ISA for the long term
I look for the same thing each time I buy shares for my Stocks and Shares ISA – does the business in question have a competitive advantage that could enable it to be profitable over the long term? If so, is the current share price attractive enough to offer me value?