As a long term investor, is it better to simply invest in the highest quality and best companies knowing the stocks are usually priced at a premium? Or does it make more sense to invest in companies that are undervalued but not as high quality? I've been contemplating this a lot lately.
I want to own companies for 20, 30, maybe even 50 years. That's the holding period I have in mind. Does it really matter if I overpay a little bit for shares of Procter & Gamble knowing they will still be around and still paying dividends decades from now? Shouldn't I place my trust and money in a company like Johnson & Johnson that will continually pay me rising dividends and will likely never fail even if the P/E is high? Why do I even invest in lower quality companies that might not be around far into the future? Should I even hold companies like Southside Bancshares (SBSI) or Intel (INTC)? This is my retirement (hopefully early) we are talking about!
In the perfect scenario the best companies would also be undervalued. While these scenarios are no brainers they are also very rare. If you want to be an owner of Coca-Cola, arguably one of the greatest companies in the world, be ready to pay a little extra for the privilege. KO is rarely on sale. My calculations put a fair value price at $30. It hasn't been at that price since October 2010. Two years ago! Good luck finding Coke at 30 bucks...
What I've done in the past is keep a list of all the stocks I want to own and buy them when they are under or fairly valued. The problem I have is that even within this list of great companies, I believe some great companies are greater than others. These are my core stocks which include ABT, JNJ, KMI, KO, MCD, PEP, PG, and PM. Coincidentally these are the same stocks that hardly ever go on sale, but the ones I strongly feel should anchor my retirement plan.
I've been thinking about beefing up these core stocks regardless of price. Why do I consider KO to be a core stock if I won't even allocate a decent amount to it? Sounds hypocritical. These 8 stocks should be my 8 largest holdings.
I'm looking for ideas and input. What do you think?