Last month, Bloomberg’s Joe Weisenthal asked, “If you had to buy one stock for a newborn (not an ETF) to hold through college, what would it be and why?” If you scroll through the thread you can see that suggestions poured in from both lay people and industry professionals. Many suggested biotech firms such as Gilead (GILD) and Illumina (ILMN), while others promoted technology such as Google (GOOG) and Amazon (AMZN). My personal suggestion was Altria (MO). This post will deal my reasoning for suggesting it.
First of all, I think that most people, when answering a question such as Joe’s, tend to approach it as, “What will make me the most money over this period of time?” However, after looking at 90 years’ worth of various industry data, and after researching my posts on the effects of disruption on various industry performance, I’ve come to believe that the right approach to answering that kind of question is first, “What stands the best chance of preserving my investment over this period,” and only then should you ask, “What is the best chance of having a positive return over this period?”
Secondly, while Mr. Weisenthal’s question specified through college (a period of, let’s say, around 20 years), I thought it wise to review the data over shorter periods of time, my logic being that most investors wouldn’t have the fortitude to stick with a losing position for more than 10 years (the actual holding period for most investors is actually much, much shorter than that).
Thirdly, we all know the Warren Buffett quote that “Price is what you pay, but value is what you get.” Given that children are born during all periods of the market cycle, there is a chance we could get a really good deal on a quality stock during a bear market, or we could overpay for that same company if we purchase it during a roaring bull market. To eliminate or at least reduce this risk, we should look for investments in industries that are less prone to dramatic booms and busts.
So, with data going back to 1926, here are the results for the high-tech industry:
The worst 10-year period return for the high-tech industry was -8.1%, and you can see from the graph above that there were two pretty significant drawdowns with the most recent (the tech bust at the end of the 20th century) being even worse than during the Great Depression. Considering that, and the fact that a company like Amazon trades at ~500x earnings, I’m not confident that history or valuations are on my side when it comes to high-technology stocks.
Another way to visualize the game of high-tech roulette is this chart of rolling 5-year returns of two tech favorites, Microsoft and Google, that my friend @EconomPic put out on Twitter:
If you owned Apple during the 1990s, you were probably a lonely shareholder (What is more likely is that you capitulated around 1997, and bought Microsoft near the top). Conversely, this century has only now started to be kind to Microsoft shareholders.
Let’s now take a look at drug stocks, the other sector du jour mentioned in the Twitter thread above:
The results in the drug industry have been similar to the high-tech industry, albeit with less dramatic results; the worst 10-year return was -1.6%. Before you get too excited, recognize that the number of companies in the drug industry has exploded, and likely with them your chance of picking the next big winner:
I should note that in my own portfolio, I own both Gilead and Illumina, and our client portfolios are long those names as well. But because we are limited to one stock for the next ten or so years, I am not inclined to bet on any one drug stock as the odds are just too great.
Ok, so we’ve concluded that it’s unwise to stake our fortune on a single high-tech or drug stock. Why would a tobacco stock like Altria be a better choice?
For one thing, from 1926-2015, the tobacco sector has not had a single negative 10-year period:
In fact the worst 10-year period from 1926-2015 for tobacco stocks was 1.3%. Nothing special, but not negative; the worst 10-year period for the market overall was about -5%. That fits my criteria for having a good probability of having my principal intact at the end of the holding period. It also indicates that (at least historically) no matter at what point I may have made my investment, I was likely not disappointed by the results after a reasonable time.
In fact, tobacco stocks in general have crushed the market over a long period of time. From July of 1926 through 2015, the tobacco industry averaged a 12.73% annual return with a Sharpe ratio of .46. This compares favorably with the market’s 10.49% return, and Sharpe of .39. In fact, no industry had similarly favorable results.*
Now, to be fair, there are reasons to object to an investment in tobacco. For one, the health concerns are well-known; governments have been fairly punitive both to the industry and to smokers (continually raising taxes on smokers, for example). It is also true that smoking, at least in the United States, has been in decline for decades:
However, you may be surprised that since 1965 (the approximate starting point on the graph above), the tobacco industry has averaged ~15.75% returns per year. That’s right; even as the percentage of smokers among adults more than halved, the tobacco industry bested its long-term returns by about 3%/year (for what it’s worth, Altria averaged 17.29%/yr going back to June of 1972, the earliest starting date available to me**).
While I am not confident that these stellar returns will continue at such a pace, I am confident that the tobacco industry is perhaps least subject to disruption than any other; after all, the cigarette and chewing tobacco are essentially unchanged after 150 years. Also, unlike the beer industry (another consumer staple) which is subject to competition from craft brewers and foreign firms, the tobacco industry is more or less an oligopoly with only four firms supplying data for industry returns in 2015. That makes me feel more confident in picking just one stock in the industry.
Obviously, tobacco is somewhat of a taboo product, and many object to having it in their portfolio. However, given the criteria I’ve outlined above, it’s hard for me to come up with a better suggestion than Altria.
Disclosure: client portfolios of Fortune Financial are long Amazon, Google, Gilead, Illumina, Apple, Microsoft, and Altria.
The author or his family are long Google, Gilead, Apple, and Illumina.
This post is not to be construed as an investment recommendation. Rather, it is merely meant for instructive of entertainment purposes.
*For those of you interested, here are the return stats for the drug and high-tech industries:
**Data from Morningstar