Stocks to Buy and Hold Forever

Back in 1972, a fellow named Thomas W. Phelps wrote a book about the ultimate buy-and-hold investing strategy. Called "100 to 1 in the Stock Market," it touts a strategy that can bring you profits of 10,000% or more in stocks.

That's like turning $1 into $100.  Or more impressively, turning $10,000 into $1 million.

The strategy? Never selling. Just buy and hold.

In these days of in-and-out Internet trading, such a strategy is even more radical than it was back in 1972, but there's sound logic behind it.

And Mr. Phelps was no amateur. He spent 40 years in the investment business.  Over the decades, from just before 1929 to the mid-70s, he was an analyst, columnist, financial advisor, private investor and author. In the early 80s, after Mr. Phelps had retired to Nantucket, my father and brother visited him and bought his remaining stock of books, and for years we doled them out as bonuses to subscribers.

Mr. Phelps' method was not complex. You didn't have to get in on the IPO. You didn't need to buy at the bottom. You just needed to be really, really patient. And you needed to have the intelligence to pick the right "forever stocks".

And these stocks are not that rare!

In fact, Mr. Phelps went back in history and found that, beginning in 1932, there were over 350 stocks in which you could have turned $1 into more than $100.  He ended his study in 1971.

Now, starting in 1932 (after the crash) is a little like cheating. But only a little. Mr. Phelps found that in every year thereafter, there was at least one stock you could have bought that could have turned $1 into $100 by 1971. The last one in his study was bought in 1967 and thus accomplished the feat in just four years. (It was Development Corp. of America, which was acquired by Lennar in 1986.)

No doubt there have been hundreds more since.

But why do so few people amass these types of profits? Mr. Phelps said it was because so few people try!

"The reason that more people don't make 10,000% on their money is that they don't set their goals high enough!"

And these days, when our perspective is so short, and people are happy with a profit of 20% earned in two weeks, it's even rarer than it was then. Low commissions and fast-breaking news all conspire to make us sell . . . so that we can move on to the next hot stock.

But there's one big reason to buy and hold that existed then and still exists now, and that will probably exist decades hence. It's the taxman. The best way to prevent Uncle Sam from getting a share of your hard-earned profits is to never sell. Pass the stock on to the next generation!

So how do you find these big winners?

According to Mr. Phelps, you look for companies that provide:

1. Inventions that enable us to do things we have always wanted to do but could never do before.

2. New methods or new equipment for doing things we long have had to do but doing them easier, faster or at less cost than ever before.

3. Processes or equipment to improve or maintain the quality of a service while reducing or eliminating the labor required.

4. New and cheaper sources of energy.

5. New methods of doing essential jobs with less or no ecological damage.

6. Improved methods or equipment for recycling the materials used by civilized man instead of making mountains of waste and oceans of sewage.

7. New methods for delivering the morning newspaper without carriers or waste.

8. New methods or equipment for transporting people and goods on land without wheels.

There's an interesting earth-friendly twist to the list that reflects the sentiments of 1972, and #8 was a nod to maglev trains, but other than that I can't argue with the list.

Mr. Phelps goes on to point out that a stock should be bought when the company is still small and undiscovered by the masses. Small companies grow faster.

He also dwells on "gates," which we typically call barriers to entry. Patents and market leadership are valuable here.

He writes about earnings, stressing that you want to find the most profitable businesses, where earnings are growing fast.

And he doesn't minimize the value of buying when stocks are temporarily depressed ... as they were in 1932 and, more recently, in 2002.

The most important aspect of all in the equation, however, is time. Says Mr. Phelps, "Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable."

To me, these last five words are magic.

So what stocks would you buy today if you wanted to hold them forever ... and you wanted them to make you (and your heirs) rich?

Five years ago, I asked this exact same question. And I put my head together with the other Cabot editors and came up with a list of 10 stocks. On July 7, 2007, I published this list, along with a description of each company.

They were:

   Baidu (BIDU)
   China Security and Surveillance Technology (CSR)
   Crocs (CROX) (CTRP)
   First Solar (FSLR)
   Illumina (ILMN)
   New Oriental Education (EDU)
   Nuance Communications (NUAN)
   Taser International (TASR)
   Tata Motors (TTM)

And I wrote, "None of these stocks is guaranteed. Any one of them might fall victim to competition, to mismanagement, to national or natural disasters, or to a bear market. But I think many of them will do very well in the long run, and if you had a windfall of $10,000, I think you might do well by putting $1,000 into each one and locking it away for a few decades."

Since then (July 2007), the S&P 500 has LOST 6%. And the stocks--on average--have done very well!

One of the recommended stocks, China Security & Surveillance, faltered and was taken private by the founder, leaving us down 66%.

First Solar is down 70%, Crocs is down 69% and Taser is down 41%, but none of them are out. Each CAN come back.

Ditto for Ctrip, down 3%. That's five losers, which are offset by five winners.

Amateurs will conclude we've come out even.

But no! Because you can only lose 100% of what you put into a stock, but you can make many times that in your biggest winners. Just see!

   Nuance Communications is up 33%.
   New Oriental Education is up 50% and is still attractive long-term.
   Tata Motors is up 54%.
   Illumina (king of genetic scientific equipment) is up 164% and still full of promise.
   And Baidu is the champion, up 472%, and just currently completing a well-deserved correction.

The AVERAGE return for these 10 stocks over the past five years has been 52.4%.

And if you've done it Mr. Phelps' way, by never selling, you haven't paid any capital gains taxes!

Featured Stock Picks

Each write-up features commentary on the picks from one or more of our expert stock market analysts, as well as company details and a stock chart.

Cabot's Forever Stocks

Most stocks are meant to bought and sold, but some are so strong that they should be held forever. We call these stocks Forever Stocks.

Timothy Lutts can be found on Google Plus.

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