10 stocks for the next 10 years

By Jim Jubak

Buy-and-hold investing isn't dead, but its DNA sure could use a bit of genetic engineering.

Buy-and-hold was never intended as buy-and-forget, but a great bull market like the one that stretched from 1982 to 2000 made it seem like all an investor had to do was buy and then add up the profits from time to time.

The two bear markets of the past decade have demonstrated exactly how dangerous buy-and-forget can be. In the first bear, from March 2000 through October 2002, the Standard & Poor's 500 Index ($INX) fell 47%. In the second bear, the one that began in October 2007 and may have bottomed (let's hope) in March 2009, the S&P 500 lost 56%.

Those bear markets have left many investors reluctant to buy stocks at all. As the market has rallied since March, individual investors have been busy withdrawing money from stocks and putting it into bonds. Most of those willing to buy stocks are like skittish white-tailed deer in hunting season -- never able to relax and always ready to bolt.

• Find a better broker for 2010

But the original advantages of long-term investing aren't extinct. Long-term investors can still take advantage of temporary panics and build positions at low cost. They can still catch long-term trends that can power a company's stock for years without being sidelined by worries about catching the best price.

All that buy-and-hold needs is a transformation from buy-and-forget to buy-and-review. Even reviewing as infrequently as annually will do the trick.

10 for the long haul

So as we start this new decade, I'm going to give you 10 stocks for the next 10 years.

Five are holdovers from the buy-and-review Jubak Picks 50 portfolio that I launched with my December 2008 book, "The Jubak Picks," and I think they're especially appropriate now. The portfolio has gained 57.8% since then (through 2009). That compares with a 28.3% gain for the S&P 500 and a 50.2% gain for the Nasdaq Composite Index ($COMPX) over the same period.

The other five are new stocks to replace five I'm dropping from the portfolio as part of this annual review.

With these buys and sells, I'm not trying to reinvent the wheel. I'm using the rules developed by long-term investors over the years -- rules that have worked well.

The buying rules involve looking for companies with:

• A lasting competitive edge. Morningstar calls this edge a "wide moat." Investor Peter Lynch famously advised looking for businesses that even an idiot could run, because one day an idiot will. Other long-term investors, such as Warren Buffett, look for companies that have built up the value of a brand name that ensures their continued dominance in a market.
  

  Why buy and hold stocks?

• A return on invested capital that's higher than that of competitors. This is insurance, because it means that a company will have lots of profit to reinvest (at a higher-than-average rate of return) in staying one step or more ahead of competitors.
• A history of research and development (or acquisition and development) demonstrating that the company doesn't fall asleep at the switch, knows how to press its advantage over competitors and can manage the change that sweeps through all parts of the global economy with increasing power these days.
• A conservative management style that can balance risk -- because companies don't survive for the long term unless they take risks -- with safety. Things can still go wrong at companies like these, but conservative management avoids bet-the-company gambles.
• An ability to recognize long-term global economic trends and to ride them even at the cost of disrupting the company's existing business.

The simple selling rules include:

• Sell when the reason you bought the company in the first place no longer applies.
• Sell when the long-term trend the company is riding turns in a direction the company didn't expect or dissipates entirely. No use investing in even the world's best buggy-whip company when cars are replacing horses.
• Sell when the larger picture -- for a market or for an economy as a whole -- heads south. No use investing in cars, even if they are replacing horses, if a financial panic makes it impossible for customers to get loans to buy horseless carriages.

Reviewing my list of 50 stocks from December 2008, I'd say that five stocks deserve to be dropped from the portfolio. In many cases, I've updated those original reasons to reflect more recent news on the company and the stock.

5 stocks on the way out

Accor: In a controversial vote, Accor's (ACRFY, news, msgs) board of directors voted Dec. 15 to split the company into two businesses. Accor Hospitality would focus on the company's hotels, while Accor Services would focus on voucher and prepaid services. The breakup still needs shareholder approval to go forward.

Activist shareholders Colony Capital and Eurazeo, which together hold 30% of the company's shares, argued that splitting the company would unlock value for shareholders. The French government, which holds 7.5% of shares, argued that it would be risky -- at a time when it's still difficult to raise capital -- to split the company's cash-cow vouchers-and-services business from its capital-hungry hotel division.

I think both sides have a point. It would be risky to separate the two businesses for exactly the reason that the government investment fund noted. But a split might light a fire under the hotel division.

What concerns me isn't so much the outcome of the vote but the erosion of good corporate governance at Accor. Executive Chairman Gilles Pélisson, who had initially opposed the breakup on grounds that neither business really could stand alone, wound up supporting the deal proposed by Colony Capital and Eurazeo. Six company directors had resigned in February when Pélisson added the job of chairman to his role as chief executive, a type of consolidation of executive authority frowned upon by many corporate-governance watchdogs.

Under the proposal approved by the board and backed by Colony Capital and Eurazeo, Pélisson will head the hotel unit if shareholders give their OK.

ING Groep: When the reason you bought a stock no longer applies, you sell. I bought ING Groep (ING, news, msgs) on this relatively straightforward story: The Dutch banking and insurance giant was redeploying assets from its mature markets in Europe into growth markets in the developing economies of the world. That, I thought, made this a good stock to buy in order to participate in the higher growth of the developing economies of Asia and Latin America.

Well, a little problem called the U.S. mortgage-market crash interrupted this plan. ING had started up a very successful effort at gathering deposits via the Internet in the United States, called ING Direct. By offering higher rates than local banks, ING Direct had gathered $75 billion in deposits by mid-2009.

The speed of that growth put ING in a bit of a bind. It was taking in deposits in the United States faster than it could deploy the capital in its own mortgage business. So to keep its deposits balanced with its loan assets, ING began to buy mortgage-backed securities. That portfolio grew to about $50 billion. And when the mortgage market blew up, so did that portfolio. ING wound up needing a $15 billion injection of cash from the Dutch government and about $33 billion in government loan guarantees.

Regulators for the European Union are making ING pay the price for that government aid. They are forcing ING to break up into two pieces, banking and insurance, and to sell off its insurance unit as well as its ING Direct business in the U.S. What will be left after the sale will be a predominantly European bank.

That may or may not be a good business, but it's surely not the business I bought when I added ING to the Jubak Picks 50 portfolio. Gone is the whole strategy of moving assets from Europe to faster-growing markets and going after the growing middle class in Asia and Latin America.

Continued: 3 more I'm selling and 5 I'm buying

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