While the majority of stock market participants are painfully focused on the short term, investors who have ignored the noise and owned large companies such as Costco or Starbucks have enjoyed life-changing returns for decades.
The chart below might make owning these two stocks a good idea, but there have been plenty of times when investing in these companies has been downright painful.
Here’s the trick to staying a shareholder in great companies through thick and thin: Instead of looking for stocks you think are about to take off, buy companies you love.
The co-founder of The Motley Fool, David Gardner, has pointed out on many occasions that the Latin root of the word investor — investors — literally means ‘wearing the clothes of’, just like sports fans wear jerseys from their favorite teams.
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I’m not suggesting that you ignore the basics when researching stocks, but as you cast your net, focus on companies you admire and believe in.
By doing this, you build the conviction that you can hold onto your winners in the most difficult market conditions.
It makes learning about the company easy
If you’ve been a long-time consumer of a company’s goods or services, you may already understand the basic business model, which makes the research process much easier. Being able to explain how a business makes money and ideally how it will make more money in the future is key to long-term success.
For example, as an ancient patron of Chipotle Mexican Grill, I have a good understanding of what sets the company apart from other fast-casual restaurants. It is one of the few places where you can expect a relatively cheap and healthy meal made from quality ingredients wherever you are in the US
While I’m not yet a shareholder, every time I go to my local Chipotle to pick up my chicken burrito bowl with guac, I wonder why I haven’t invested. The lines are always long, and yet I am always pleasantly surprised by how quickly I get in and out with my food. Needless to say, these qualities keep me coming back to contribute to the company’s steadily growing financial results.
I’m not writing this to say you should rush to buy Chipotle stock, but to make it clear that it’s much easier to research and understand companies if you’ve been a long-time customer.
The better you understand how a company’s business works, the more confident you will be in the stock. We’re all fans of brands and products, so make it easier on yourself and focus on the companies you already know and admire.
Believing in companies makes it easier to hold on to them
Besides being a happy customer, another reason you’re a fan of a company is because you believe in its mission. In a 2019 publication, Deloitte found that targeted companies grow on average three times faster than their competitors.
When you invest in companies whose purpose aligns with your personal values or vision for the future, you will find it much easier to sustain during periods of extreme volatility.
Let us think Tesla as an example. While the company’s eccentric CEO has certainly caused a lot of controversy, this company is a mission-driven organization.
Its aim is to accelerate the global transition to sustainable energy, and it has already made significant strides as a global leader in the electric car industry, a space that many experts believe would never become mainstream.
If you’ve owned the stock for more than a few years, you’re probably very pleased, but it’s been a roller coaster ride. Check out the following charts showing the trajectory of Tesla stock over the long term and over the past eight months.
As you can see in the first chart, owning the stock seems easy when you zoom out on great companies. But long-term Tesla shareholders are also all too familiar with the second chart, and this isn’t the first time the stock has seen an extended period of volatility.
All major companies go through such periods. Amazon has fallen by 50% on four separate occasions, and even Berkshire Hathaway has seen its share price halve three times.
If you want to own great businesses for a long time, you should prepare for similar sales. And one of the most effective ways to do this is to own companies you believe in.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Mark Blank has positions in Tesla. The Motley Fool holds positions in and recommends Amazon, Berkshire Hathaway (B shares), Chipotle Mexican Grill, Costco Wholesale, Starbucks and Tesla. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B-shares), short January 2023 on Berkshire Hathaway (B-shares), short January 2023 $265 calls on Berkshire Hathaway (B-shares) and short October 2022 calling $85 on Starbucks. The Motley Fool has a disclosure policy.