The best stocks for long-term investment success—here’s a winning approach to take, and how to select them

To succeed as an investor, you need to focus on basic principles, and downplay or ignore trivia. Basic principles provide the fuel for market booms that go on for many years, if not decades. If you focus on important matters that have a long-term impact on the market, it will help you improve your long-term investment results.

Instead, many investors and commentators spend their time trying to figure out the impact of passing matters—the sideshows, rather than the main event. There’s a large random element in these matters. What’s more, exaggerated media coverage can draw attention to them that is out of proportion to any impact they are likely to have.

In today’s hypercompetitive media market, commentators and publishers aim for shock value rather than balance. They start by talking about the worst that can happen. From there they go on to dwell on the secondary and tertiary consequences that would follow, in the low-probability event that the worst comes to pass.

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This, by the way, is another example of the conflicts of interest we often warn about. Conflicts of interest pose a more direct financial threat to you in your dealings with the investment industry, of course. But the media’s bouts of negative focus can also spur investors to make costly financial mistakes—so can the views of politicians, who have conflicts of interest.

But let’s look more specifically at how Successful Investors can find the best stocks for long-term investment:

Tip # 1: The best stocks for long-term investment growth have hidden assets

For a long time we’ve written about the “heads-you-win, tails-you-break-even” phenomena. That’s what you get in an investment that exposes patient investors to limited risk of long-term loss, but one that can deliver healthy if not substantial returns.

These situations sometimes come about when a stock has been an unimpressive or weak performer for a number of years. When that happens, investors often focus on the earnings weakness and lose sight of the company’s assets.

If you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose. But the best hidden assets will eventually expand a company’s profit, grab investor attention, and push up its stock price.

Tip #2: The best stocks for long-term investment growth are dividend payers

One Successful Investor tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a special tax break they may be eligible to receive.

Tip #3: Dividend stocks can fully benefit from compounding

Compound interest is earning interest on interest. Over time, your long-term investments will earn more and more money from the effects of compound interest. Compound interest is what makes investing a worthwhile pursuit.

Compounding also applies to dividends from equity investments like stocks, as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past investment returns, the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate. The compounding effect can be heightened when investors reinvest dividends.

Bonus Tip: Watch out for conflicts of interest

As we touched on earlier, one of the greatest risks you face as an investor is to fall victim to a conflict of interest from a broker.

When we raise this idea to friends of ours who work as brokers, they sometimes say, “You must have an awful opinion of brokers, judging by the terrible things you say about us.”

That’s a misconception. Brokers are human. Some are people of high integrity; others, not quite so much. But the core of the problem is that the financial industry offers its salespeople incentives to give clients bad advice.

A broker can sell his or her clients a wide variety of products and services that will bring the broker a wide range of fees and commissions, from high to low. As a general rule, the more income a broker earns from selling a particular investment, the weaker the match between the investment and the interests of the client.

Overall, investors lose more money to conflicts of interest than to any other single risk. That’s not a comment about the average broker’s sense of ethics. It’s simply a matter of frequency of exposure times risk per exposure, coupled with the low standard presented by the suitability rule.

What type of stock holding has been most successful over the long-term in your investing career?

What qualities do you look for in a stock that make it a suitable long-term investment?