The stock market can be a very tricky environment to navigate even for the most experienced investors. There’s no telling in which direction the market will move next, and as we saw earlier this week, sell-offs, when they emerge, can be very aggressive.
However, while we do not know when the next crash will come or how long it will last, the one thing we do know is that over the long term, investing always generates results.
Calculating the chance of losses
According to data compiled by my Foolish colleagues in the US, between 1871 (as far back as data goes) and 2015, the odds of losing money by being invested in the US main index, the S&P 500, on a daily basis has averaged 53% for the period. In other words, you have a 50/50 chance of losing or making money in the stock market if you’re invested for just one day.
This completely changes if you invest for more than five years. According to the figures, you have just a 20% chance of losing money over a five-year period, and if you invest for 20 years, the probability of loss is zero (unless you’re really unlucky). This implies that no investor who has been invested for 20 years or more in the S&P 500 over the past 144 years has lost money — an impressive statistic.
Seeking quality
These are backward-looking figures, and you should never invest based on historic data alone, but they do contain a crucial lesson about long-term investing.
Specifically, it’s very difficult to go wrong buying shares in high-quality companies and forgetting about them. That’s why I’m still buying despite market volatility.
There are many high-quality businesses that have seen their shares slide in recent weeks for no apparent reason. British American Tobacco is a great example. Since the beginning of the year, the stock has crumbled by around 10%, extending declines since May of last year to a total of 17% excluding dividends. The shares are now trading at a forward P/E of 14, the company’s cheapest valuation in years, despite the fact that its newly-acquired US business should receive a tremendous boost from Trump’s tax reforms.
Another great example is GlaxoSmithKline. Over the past 12 months, shares in this pharmaceuticals giant have fallen from a high around 1,722p to 1,250p on dividend and growth concerns. Yesterday, the company’s fourth-quarter results made it clear that these concerns are overblown as the group announced high-single-digit revenue growth and a commitment to its current dividend distribution. The shares trade at a forward P/E of 11.6 and offer a dividend yield of 6.4%.
Lastly, there’s consumer goods firm Unilever, which has seen its share price fall by more than 10% over the past few months, despite a recent commitment to sell non-core assets to improve profit margins and return millions to shareholders.
Fundamentally, all of these companies are highly attractive, but for some reason, their shares have lagged the markets over the past few months. These declines present an excellent opportunity for investors with a longer investment horizon to buy into some of London’s most successful businesses at discounted valuations.
