Become a (Business) Historian, and Build a LIST of ALL STARS.
Blame it on my B.A. in History, but I swear that one of the best investments I ever made was spending a combined $13 on Amazon, to buy a couple of old S&P 500 guides from the early and mid 1990s.
Combining those old guides with current data from Value Line and Morningstar, I now have data on S&P 500 companies going back to 1989. (Coincidentally, the year of my birth as well)
I find this really helpful, bc being an "all-star" business for 20 years is way more difficult than being an "all-star" for 10 yeards.
Thanks to a nature of capitalism, not many companies can maintain unusally high returns on incremental capital or equity over the span of entire decade and FAR fewer are able to accomplish such a feat over nearly a generation, 20 years or even more.
But, how difficult is it?
Well, I found 49 businesses in the S&P 500 (2004 edition) generated a 20 year average ROE of 20% or more, and had had ZERO years below 15%, in the 10 year period from 1993-2002.
So how did those 49 do over the NEXT decade? (2003-present)
Of those 49, 11 of them (22%) were aquired, 20 of them (41%) did not sustain ROE sufficient to remain on the list, and 18 of them (37%) were are STILL on the list today.
The 18 that survived the 20 year test were: ABT, MO, BBBY, BF.B, IFF, IGT, JNJ, K, KO, MMM, OMC, ORCL, PAYX, PEP, PX, SYY, and WMT.
Among those that were aquired were Gillette and Wrigley.
*Note: I could only get 19 years of data on BBBY, IGT, PAYX since they were in the 2004 guide, going back to 1994, but not the 1996 guide, going back to 1989. This means that I simply don't know what ROE they generated in 2003, the 20th year. Nevertheless, assuming they pass the test for 2013, that will make it a full 20 years (if not significantly longer.)
Now, WHY the heck do I spend so much time reading S&P 500 guides from 1996??
The answer is that it actually makes investing easier, and less time consuming.
Having 25 years of data, and restricting myself to maybe the top 100 or so businsses over the past 25 years, allows me to significanly narrow my universe of stocks from the 2700 or so in Value Line, to a much more manageable 100 or so.
Not only am I able to spend more time on each all-star company, but I can spend more time overall on other fun things...like drinking beer, watching sports, and sitting on my ass.
Now, i'm not saying that your criteria for "all-star companies" needs to be so rigid, but I believe you should created a list of 20 year all-stars based on your own criteria.
The good news is that this list of 20 year all-stars dosen't change very often. Once you collect the data, you only have to update it once a year.
This allows more time to sit on your ass, and wait for Mr. Market to convulse and offer one of those all-star businesses at a silly cheap price. It's really just a process that requires three main skills:
1) Collecting long-term financial data over a 25 year period or so, and track the all-stars, which is not too tough a challenge, once yu get over the inital data gathering.
2) Patiently waiting for one or more of those all-stars to get cheap based on normalized earnings/cash flows. Again, not too hard.
3) *Being virtually certain that the "cheap" all-star you're looking to invest in has a very very high probability of still being an all-star in 5-10 or more years. (This is the HARD part, this is what Warren and Charlie have sat around reading and thinking about for most of the past half-century aka maintaining a durable competitive advantage)
So, I guess, the point of this post is to persuade YOU to build your own data base of the top 3%-5% or so of companies over the past two decade, based on your criteria. Ignore the other 95%-97% of businesses entirely.
Then, get to know the all stars intimately. Know them inside, know them outside, know them so well, that if the price actually falls to an attractive level, you won't even need to do any additional reserach on them. You will be able to act instantly because you already did most of the research.
In between such rare oppurtunities, you'll have lots of free time to read, and simply sit on your ass, like Charlie always says:
"If you buy a business just because it's undervalued, than you have to worry about selling it when it reaches its intrinsic value. That's hard. But if you can buy a few great companies, then you can sit on your ass. That's a good thing.”- Charlie Munger
I'm 24, and have only been investing for 2.5 years, but I think this "all star" system is a pretty good process for successful investing.
Only time will tell...
Best of luck, and thanks for reading!