On the sidelines of this meeting, we attended a presentation by the management team of Markel, a stock that we hold in some of our portfolios under management.
Would you be willing to buy 15 to 20 stocks and keep them as they are, without any trades, for the next 25 years?
This is the challenge launched by the family of Mr. Thomas Gayner, president of Markel, an American insurance company. The family is donating US$30,000 per year for 25 years to two investment clubs at two American universities. Each of these clubs will have to choose and buy between 15 and 25 stocks – and keep them without making any subsequent transactions – for 25 years. From year 26, half of the value of the first portfolio will be used to pay scholarships, the other half will be reinvested in the same way for the following 25 years and so on, year after year.
I find the concept very interesting! There are already many student investment competitions, but most aim to achieve the best returns during an academic year, a horizon of a few months, at most. The exercise is formative because it allows the students who participate to familiarize themselves with the stock market, but we cannot say that it promotes long-term investment. Yet, if there are investors who should take a truly long-term perspective, it is students who have nearly 50 years of investing ahead of them!
If you were among the students who will have to choose 20 stocks for the next 25 years, what would be your selection criteria?
I imagine that everyone will have their own selection process – hence the educational interest of such an exercise.
Personally, I would proceed first by elimination.
I would start by excluding companies that are not making a profit. The chances of a loss-making company surviving for 25 years are, in my opinion, too slim.
Then, I would eliminate companies operating in sectors that face drastic and unpredictable changes. If you don’t have a good idea of where a business will be in three to five years, imagine the uncertainty over a 25-year period.
I would also exclude companies that have too much debt. The financial risk for such companies is too great over a 25-year horizon.
Finally, I would eliminate companies operating in very cyclical sectors. In the long term, most companies in such sectors fail to create much value for their shareholders.
That would leave companies that have been profitable (ideally for a long time and showing robust growth for several years), not very cyclical, evolving in “relatively” stable and predictable sectors and in good financial health.
Among these companies, I would tend to favour companies that are well established, but not too big. Wal-Mart is probably one of the companies that would not be eliminated, but can we see high growth for the next 25 years for a company that today has revenues of more than US$600 billion?
Also, I would favour companies whose business model is protected by high barriers to entry. Twenty-five years is a long time, and we want to put all the chances on our side that the greatest number of the selected companies will survive and progress during this quarter century.
Finally, although the valuation of a stock loses some of its importance when one thinks in terms of a 25-year horizon (the quality of the business model and of the management team becomes crucial), it is nonetheless important. I would make sure not to pay too high valuation ratios for the selected stocks.
This is how I would go about it. This is a preliminary analysis. I can very well imagine that a group of students could spend an entire university semester selecting 15 to 20 stocks for the next 25 years!
