I am a believer in long-term investing. Rather than trying to duck in and out of markets and exploiting changing share prices, I prefer to buy parts of companies I think have great prospects. I then wait in the hope that they live up to the potential I see. I have been thinking about some shares to buy now for my portfolio using this approach — which I explain here.
Looking ahead a decade
What might be the characteristics of such a company?
I would be looking for businesses that have been investing in unique offerings that I expect to see long-term demand. Ideally, they would have business models that mean the marginal costs of adding new customers are small. For example, maybe they are spending now to develop a scalable platform that can be the basis of strong future growth in user numbers.
I can think of quite a few companies that match that description. I think Netflix and Paypal do, which is one reason I have bought both for my portfolio lately. I think Amazon and Apple do too.
How to value shares
So does that mean that all such companies are shares to buy for my portfolio?
No, it does not. That is because valuation is critical in determining my long-term investing returns. Buying shares in a great company is only one part of the equation. I also need to buy them at the right price. If I overpay, even if the company grows its customer base and profits, the share price may not increase. If I pay too rich a valuation, I could lose money even though the business performs well.
Looking back to the dotcom boom is an instructive lesson in this. I think Photo-Me is a company with a strong competitive advantage that can reap long-term benefits from its installed base of machines. Its recent interim results helped underline the profitability of the business model. But if I had bought the shares at the height of the dotcom boom over two decades ago, today they would be worth less than a third of what I paid for them!
Shares to buy now
I have been considering shares to buy for my portfolio using this approach. One that is catching my eye right now is Google and YouTube owner Alphabet. It has spent years investing in building its digital platform. I expect that to help it make profits for years to come. A decade from now, in fact, I would say there is a fair chance that Alphabet’s business will be even more lucrative than it is now.
Despite that, the shares have fallen 11% in the past year and now trade on a price-to-earnings ratio in the low twenties. That is not cheap but I think it is reasonable value for a company of Alphabet’s quality. There are risks: its success could mean regulators try to break it up in future, for example. But it has a business I think has excellent long-term growth prospects, a profitable model, and what I see as a reasonable share price. That is what I look for when building my portfolio — which is why I would consider adding Alphabet to it right now.