An Investing Tip From An Investing Master

Credit: Simon Cunningham

Peter Lynch was the head of the US-based Fidelity Magellan fund in 1977, where he managed to deliver 29% annualized returns for his clients over 13 years. In his book One Up on Wall Street, the investing master shared his own way of categorising companies that he had chosen for further investigation.

One of the categories was “stalwarts”.

The term “stalwarts”, as defined by Lynch, refers to dominant multi-billion dollar companies such as The Coca Cola Co., Proctor and Gamble Co and Hersheys Co. In this instance, Coca-Cola is a global giant in beverages, while Proctor and Gamble and Hersheys hold significant market positions in consumer goods, and chocolate manufacturing respectively. Lynch had this to say about the nature of stalwart companies:

“These multibillion-dollar hulks are not exactly agile climbers. When you traffic in stalwarts, you’re more or less in the foothills: 10 to 12 percent annual growth in earnings.”

With that in mind, what role do stalwart companies play in a Foolish investor’s portfolio?

Loyal and Strong

The Merriam Webster dictionary describes the word “stalwart” as loyal and physically strong. It follows that companies of this nature are the ones which we rely on for steady dividends or returns in more turbulent times, or as Lynch would put it:

“I always keep some stalwarts in my portfolio because they offer pretty good protection during recessions and hard times.”

As such, Foolish investors might want to consider finding a place for steady “stalwarts” to form a solid foundation to your portfolio. Its companies like these which may provide a reliable source of dividend income and a steady amount of growth even in times of duress.

Stalwarts of the Singapore market

At the local front, a company like ComfortDelgro Corporation Limited (SGX:C52) might fit the bill. The global transportation outfit steadily paid out increasing dividends through the Great Financial Crisis (2008 to 2009). The dividends were backed with ample free-cash-flow and a net cash position through the last decade. Its market cap stood at north of S$5 billion last Friday (25 October 2014).

Foolish Take away

If the Foolish investor is thinking of hitting the buy button immediately, do note that Lynch had one last comment to make when it comes to stalwarts:

“Depending on when you buy them and at what price, you can make a sizable profit in stalwarts. As you can see on the Proctor and Gamble chart, the stock performed well throughout the 1980s. However, if you’d bought back in 1963, you only made four-fold on your money. Holding a stock for twenty five-years for that kind of return isn’t a very exciting prospect — since you’re no better off than if you’d bought a bond or stuck with a cash fund”

In this statement, Lynch was partly appealing to individual investors to pay more attention to the price they would pay for stalwarts. The reasoning could be that the stability offered by the massive scale of stalwarts can reversely become a bane when it comes to the growth of the company. Naturally, it becomes harder for companies to grow when its revenue and earnings becomes larger. As such, a conservative assumption of growth should be used when figuring out the valuation of stalwarts.

In all, stalwarts can offer a good night’s sleep in harder times in the share market. And, if a good night’s sleep is what we are looking for, a good price paid certainly helps. For more free investing tips, sign up now for a FREE subscription to The Motley Fool’s weekly investing newsletter Take Stock Singapore. 

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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 doesn’t own shares in any companies mentioned.