One key principle to building a long-term portfolio

Fsp Invest, 29 Sep. 2013

Tags: long-term portfolio, long-term, warren buffett, shares, book value, what is book value

If you want to replicate the kind of long-term investing success that Warren Buffett enjoys there are some key criteria shares should meet. Read on to uncover one key principle to building a long-term portfolio…

When you select shares to form part of a long-term portfolio, there are some criteria shares should meet, Tom Dyson in Palm Beach Letter explains...

Make sure potential shares make this standard

There are several criteria a share must have before you should include it in your long-term portfolio of shares. Here’s one of them…

#1. It must be a continually growing business
This criterion is about safety. You should only select companies that have grown consistently over time.

This begs the question: "How do you measure growth?" One way is to track the growth in book value.

Book value is the amount you'd get if you shut down the business, sold the assets, and paid off any outstanding debt.

Book value is good, but it's not perfect.

For one thing, it does not count intangible values, such as the power of a worldwide brand. You don't need to be a financial analyst to understand the financial value of having a brand such as McDonald's, Apple or Disney.

Book value also underestimates companies whose assets as a whole are greater than the separate parts.

But when book value misses the mark in this way, you shouldn’t mind, since it does so by underestimating value. And that is something that plays in your favour, since with a long-term portfolio it sometimes pays to be conservative than aggressive.

Even though book value is a good way to measure growth, sometimes companies will be growing even though their book value won't show it.

So there you have it, one key principle to building a long-term portfolio.

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