How to Find Long Term Winners in the Share Market

In our past articles, we have shown that companies held over the long term can produce multi-bagging returns. Alongside these returns, we have also shown that an essential element of successful investing comes in the form of placing time on our side.

If you – our dear reader – have bought into the idea of long term investing, the next question may come into mind.

So, where do I start?

This question happens to be similar to what I had posed to The Motley Fool’s co-founder and Chief Executive, Tom Gardner, back in 5 June 2009. A younger, and more curious, version of me said that the buy and hold investing does work – but, I added, only for the right companies.

This is what Tom had to say:

“I remember reading about Buffett challenges his associates [sic] to think about which sorts of industries and companies deserve long-term capital. Same thing with Bernard Baruch, a great investor. One thing they’ve both pointed to are consumer product companies selling low-priced items which millions of consumers use every day. Candy, food, household products, et cetera. I do think daily/weekly mainstream habits are a good place to look for multi-year, even multi-decade, holding periods. Go opposite to that — think autos — and you have groups of avoid. “

So, can you think of any?

With Tom’s advice in mind, let’s see what we can find in the local front.

On the SGX, BreadTalk Group Limited (SGX: 5DA) operates a network of more than 800 bakeries and restaurant outlets around Asia, including Singapore, Mainland China, Hong Kong, and Indonesia.

With brands such as Toastbox, Din Tai Fung, and Food Republic, the company serves thousands of customers every day. Its freshly baked buns typically sell for less than $2 as well. With its affordable price, BreadTalk has reported that it sells one pork floss bun (its signature bun) every 10 seconds. The affordably-priced items, which is sold to thousands daily, has helped the company’s share price rise by 469% (including re-invested dividends) since 1 January 2009. BreadTalk trades at a price to earnings ratio (PE) of 28 at its current price of S$1.32.

Other companies serving many customers may not be as obvious as BreadTalk. For instance, vehicle inspection company VICOM Limited (SGX: V01) has actually inspected more than 7 million vehicles from 1982 to 2010. The inspection cost per car of S$62 borne by vehicle owners when they send their vehicles in for mandatory annual or biennial inspections provides Vicom with a steady stream of income.

The same profits have helped move the company’s share price up by 495% since 1 Jan 2009. It currently trades at a PE of 20 at its price of S$6.72.

Foolish Take Away

The CEO of Google, Larry Page, once said that he would like to build products which are used by people around the world on a daily basis. “Like a toothbrush” he said. It is possible that Mr. Page was thinking about the long term sustainability of his company as it meant that Google would not rely on a handful of customers for its growth and survival.

This may just be the direction that Tom is getting at.

The earlier advice from Tom represents a thought-starter regarding companies which might become long term winners for investors. It is by no means a sure thing, but it helps the individual investor to start thinking through how sales can come in for the company, and how sustainable it would be over the long term. It is the sustainable execution and results which can prove a big driver to the share price.

So, the further we move in that direction, the better the position we might just put ourselves in in terms of finding the next long term winner for the decades ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Google.