Too many people see investing as a way to get rich quick, but they actually have it the wrong way around.
Investing is about getting rich slowly, but surely, year after year.
The best things in life take time, and if you try to build a portfolio too rapidly you are likely to come unstuck.
Putting your money into whizzy growth stocks may sound exciting, but you can lose money as rapidly as you gain it. In the longer run, boring businesses can be much more rewarding.
So forget shoot-the-lights out oil explorers, junior mining companies or technology start-ups, and think keep-the-lights on stocks such as water and electricity suppliers, household goods suppliers and tin can makers.
Investment legend Warren Buffett learnt this investing strategy long ago; he loves "boring" businesses like utilities, soft drinks, toothpaste, bricks and carpet manufacturers. Here is guide to investing in these lucrative dullards:
Bunzl of fun
The chances are you have never heard of London-listed packaging company Bunzl, even if you hail from the United Kingdom.
This multinational outsourcer has a low profile because its job is to help other companies manage their everyday functions, by supplying napkins and disposable cutlery to restaurants, plastic bags to supermarkets, and janitorial products to hospitals.
Fallen asleep yet? Here is the exciting bit. Over the last 10 years, the shares are up 206 per cent, against a rise of just 11 per cent on the UK's FTSE 100 index. With dividends re-invested, the total return is 306 per cent, according to online trading platform AJ Bell, whose investment director Russ Mould says: "Bunzl shows that boring can be best."
Too many investors focus on share price growth and overlook dividends, which are the key to making money in the longer run. They could ultimately account for as much as three quarters of your total returns, provided you invest them back into the stock for future growth. Dull was never so much fun.
Sam Instone, the chief executive of AES International, says established companies with stable cash flows and dividends may bore thrill-seekers but can ultimately deliver while the latest hot new tech stock or cryptocurrency briefly dazzles then falls by the wayside. We are talking tortoise and hare here.
Beverage maker The Coca-Cola Company, US telecommunications major AT&T and US retailing firm Walmart Stores show that slow but sure still wins the investment race. "They fall into the category of mature and stable, and are therefore, probably boring for some people," says Mr Instone.
The key is to give them time to prove their worth. Mr Buffett bought his first shares in Coca-Cola in 1988 for just US$2.45. At time of writing they trade at just over $44, almost 18 times as much. They also yield 3.33 per cent a year, so with dividends reinvested Mr Buffett's total return will be far, far higher.
The secret to making a success of investing in boring companies is to hold them for the long-term and let the growth and dividend income compound.
Mr Buffett's investment vehicle Berkshire Hathaway's top 10 holdings contains a series of less-than-exciting companies, including credit rating agency Moody’s, US banks Wells Fargo and Bancorp, personal and household product supplier Procter & Gamble, technology company IBM, American Express and of course Walmart and Coca-Cola.
Mr Instone says these “bread and butter” stocks are low-risk but highly rewarding. “Investing isn’t speculating, it shouldn’t be a thrill-seeking gamble. Done right, investing is as boring as watching paint dry and grass grow.”
If you do not want to buy individual stocks he says you can take the slow and steady route to wealth by building a well-diversified, low-cost portfolio of exchange traded funds (ETFs), which track performance of the major global stock markets. “Invest as soon as you have the money available and hold for the long-term, ignoring short-term market volatility and noise.”
There are plenty more dull but surprisingly exciting stocks to choose from, including utility firms such as American Waterworks Company, DTE Energy, whose share prices have all more than doubled in five years, as has US insurer Cincinnati Financial. Medical suppliers Becton Dickinson and CR Bard have seen their share prices triple in five years.
Chris Beauchamp, a senior market analyst at online trading platform IG, picks out the Colgate-Palmolive Company and pharmaceutical medical devices company Johnson & Johnson as his favourite non-glamour stocks. “They combine steady earnings growth with an attractive dividend income, yielding 2.18 per cent and 2.54 per cent respectively, with a progressive dividend policy,” he says.
Both sell everyday products that people still buy regardless of how the economy is doing, such as toothpaste, soap, kitchen sprays, pet food, shampoo, disposable contact lenses, and cold and allergy treatments.
Mr Beauchamp also picks out US manufacturer Crown Holdings, which makes aerosol, food and soft drinks cans, and celebrates its 125th anniversary this year.
Laith Khalaf, a senior analyst at UK wealth managers Hargreaves Lansdown, names UK-listed global consumer goods giant Unilever as a classic dull and defensive stock. “Its roll call of brands includes Jif, Domestos, Dove soap, Knorr, Lipton, Lux, Signal toothpaste, Sunsilk, Vaseline and it has delivered consistent earnings growth for year after year.”
Unilever is exciting enough to have recently attracted a $143 billion acquisition bid from Kraft-Heinz, which it fought off, and the chief executive Paul Polman is now focusing on boosting investor returns. “For a company which already enjoys an impressive track record for dividend growth, that’s quite an attractive commitment,” Mr Khalaf says.
British water utility Pennon is another humdrum company to consider, he adds. It yields an attractive 4.45 per cent a year and plans to increase that by the UK inflation rate plus 4 per cent a year until at least 2020. “It does have a slightly more racy division which offers more growth potential, although a household waste recycling business called Viridor will not set too many pulses racing.”
Global credit analytics agency Experian is also one to watch, as it supplies data to help banks and retailers credit score customers and make lending and marketing decisions. “Experian has pretty unique products, good pricing power and margins, strong cash generation and controlled debts. It has paid regular, growing dividends for years and also returned surplus capital through share buy-backs, boosting overall shareholder returns," says Mr Khalaf.
Mr Khalaf adds that getting rich slow is the key to building a decent nest egg and dull companies often do this the best. “Providing customers with water or cleaning products may not be the most glamorous of activities, but it can pay dividends for shareholders if steady growth can be compounded over the long term.”
Innovative, disruptive, ground-breaking companies still have a place in your investment portfolio, but sometimes boring is best.