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Long-term investments are any investments that you plan to hold onto for at least ten years. The basic idea is that by holding a stock longer, the stock would have more time to recover after downturns, so you can beat market volatility.

Many investors and wannabe investors understand the benefit of long-term investing, but unfortunately, many also don't know how to start. Indeed, identifying which stocks are good long-term investments and which aren't is easier said than done.

In long-term investing, we are discouraged from selling early and switching to other stocks, so it's important to choose right the first time around.

In this article, we'll discuss how to identify good long-term buys.

Key Factors to Consider Before Buying a Stock Long-Term

1. Investment strategy

There are three basic investment strategies that investors can adopt when picking stocks for long-term investing:

1. Value investing strategy: The focus of this strategic approach is to find and invest in stocks that are currently undervalued (currently priced lower than their intrinsic value.) This strategy would mainly involve the use of fundamental analysis to determine the intrinsic value of the stock.


2. Growth investing strategy: This strategy emphasizes investing in growth stocks, which are stocks of smaller or younger companies (i.e., startups) that are expected to increase at a rapid above-average rate.


3. Income investing strategy: Finally, income investing is a strategy in which investors look for typically established companies that regularly pay significant dividends. These dividends, along with price appreciation of the stocks, would result in increased return potential.

All three of these strategies can be applied in long-term stock investing, but as you can see, the choice of stocks in each strategy would differ greatly.

So, before anything else, assess your investing style and risk profile so you can choose the best possible strategy that fits you. Keep in mind that you don't need to adopt only one exclusive strategy. You can combine two or even all three of them.

2. Fundamental Analysis

Although technical analysis can play its part in long-term stock investing, fundamental analysis is more widely used, especially with a value investing strategy.

Fundamental analysis is performed by keeping track of numerous macroeconomic and microeconomic factors related to the stock's performance, including industry conditions, geopolitics, and others.

However, in relation to finding long-term stocks to invest in, we can focus on monitoring several key fundamental metrics of the stock in question:

1. Earnings per Share (EPS): The company's net profit divided by the number of outstanding common shares. Useful for estimating the stock's intrinsic value and is also important if you are adopting the value investing strategy.


2. Price-to-earnings (P/E) Ratio: Current stock price divided by the annual EPS. The lower the P/E ratio, the higher the stock's intrinsic value is. It is important, however, to compare a stock’s P/E ratio against the stocks of other companies in its industry to gauge its relative value.


3. Debt-to-equity ratio: Helps determine how much the company is in debt. A high debt-to-equity ratio may be a sign that the stock is a high-risk investment.


4. Price-to-earnings-growth (PEG) ratio: The company's P/E ratio divided by the expected growth rate of the annual earnings. For example, a company with a P/E ratio of 10 and 10% expected annualized earnings growth over the next five years would have a PEG ratio of 1.0. A low PEG ratio could expose a good value opportunity.

3. Market Capitalization

The size of the company you plan to invest in would determine the risk you'll assume when buying the respective stock.

The size of a company can be determined by looking at the company's market capitalization. Companies with larger market capitalizations are typically less risky to invest in: they tend to be established names and are less vulnerable to takeovers and price wars, and are less volatile in general. They also generally have more trading liquidity, making it easier to get in and out of the stock when desired.

However, smaller companies may have the potential to grow at a rapid rate, which may be a factor to consider if you decide to adopt the growth investing strategy.

4. Mutual Funds Holding

A good indicator of whether a company is safe to invest in long-term is to check how many mutual funds hold the stock. A stock that is held by many mutual funds is generally considered more low-risk to invest in.

5. Revenue Growth

For long-term investing, regardless of strategy, it's very important to check whether the company is growing. A good way to do so is to assess growth in its revenue and its earnings.

6. Dividend History

A very important metric to monitor for investors who'd like to adopt the income investing strategy. Companies with high dividend yields offer some nice income potential, but high dividend yields often correlate with lower stock prices, so it is important to understand why a stock has a high dividend yield before investing in it.

Preferred shares, on the other hand, typically don't have voting rights, but they have priority over common shares to receive dividends (hence the name "preferred.")

However, even if you adopt strategies other than income investing, monitoring how consistently a company can pay and raise its dividends is a good way to measure its financial stability.

Monitor at least five years of dividend history to give you a clear idea about dividend consistency.

7. Volatility

Although long-term investing naturally allows investors to avoid market volatility, in general, low-volatility stocks are preferred since they'll give investors more time to exit an investment (i.e., to take profits) when needed.

8. Identifying Value Traps

A value trap in the context of value investing strategy is when the stock looks cheaper than its intrinsic value but will go down in value in the future or simply not go anywhere for an extended length of time.

There are two key metrics to monitor to identify whether a stock that seems undervalued is a value trap or otherwise: current ratio and debt ratio.

1. Debt ratio: The percentage of assets that have been financed with debt. Calculated by dividing the company's total liabilities by total assets.


2. Current ratio: To get the current ratio, we divide the company's current assets with current liabilities, hence the name.

When a company has a current ratio of three, it means the company is liquid enough to pay three times its liabilities.

The higher the debt ratio, the more likely the company is a value trap, while the higher the current ratio, the more likely it is a financially viable company.

9. Earnings Projection

One strong metric to monitor to evaluate whether a stock is a good long-term investment is to watch for fluctuating earnings by evaluating past earnings and future earnings projections.

If the company's past earnings history shows a consistent rise over a period of many years, it could be a sign of a good long-term investment.

On the other hand, evaluate the company's future earnings projection and whether it's expected to remain strong.

How to Be Successful in Long-Term Stock Investing

On the surface, long-term stock investing may seem quite simple.

However, in practice, buy-and-hold isn't as simple as it sounds. Not only does it require a good selection of stocks (as we've discussed above), but it also requires a strong mentality and discipline to remain focused on long-term financial objectives.

In this section, we will share some actionable tips to help you be successful in long-term investing:

1. Don’t time the market

The term ‘market timing’ refers to the practice of buying and selling equities (in this case, stocks) in an attempt to profit during the market highs while avoiding the lows.

Simply put, even with all the ‘advanced’ analysis techniques, trading robots, and other methods, 100% accuracy in timing the market is impossible, and it is extremely risky.

Unfortunately, the trap of trying to time the market has tripped even the most experienced and knowledgeable investors. Many have sold their stocks during a down period, only to lose out on gains when the price suddenly rises again, and vice versa.

So, don’t fall into the same hole. The idea of long-term stock investing is that historically over the long term, the stock market has always recovered from down periods.

2. Don’t be afraid to sell a loser

An important principle in long-term stock investing that you should keep in mind is to cut your losses fast.

It’s important to be realistic when a company is poorly performing with no signs of bouncing back in the near future and sell them ASAP. Yes, acknowledging our failure in choosing this stock may feel embarrassing, but there’s actually no shame in cutting your losses early.

What’s important is to learn from your mistakes and keep improving your portfolio.

3. Stick to your chosen strategy

Pick a strategy (as we’ve discussed in the previous section) and stick with it.

Switching between different strategies while reacting to different situations actually makes you a market timer, which, as we’ve discussed above, is very risky and dangerous.

Yes, you can change your strategy if it's absolutely necessary, but make sure there’s a sound analysis behind it.

Another related practice is to never accept a hot tip as valid as-is, regardless of the source. Always do your own analysis on any stock before buying/selling any company or changing your strategy.

4. Diversify your investment

If you put all your investments in a single company, you could expose your money to too much risk or vice versa; you may miss out on potential returns you’d otherwise get from other stocks.

Consider spreading your investment on different stocks in different industries and even across different asset classes (U.S. Treasury bills, CDs, real estate, fixed-income investments, etc.).

While there’s no guarantee that diversifying your assets can reduce risks or increase returns, it’s typically a better practice than keeping everything in one basket.

5. Monitor your progress and adjust

Keep tabs on your portfolio’s progress.

Market swings may shift your investment’s performance away from your objective, and when this happens, you should make adjustments to your portfolio, whether by moving your money between investments, selling loser stocks, or adding new companies to your portfolio.

Whenever there’s any big change in your life situation (a new baby on the way, a marriage, a divorce, a raise, etc.), you may also want to adjust your investments, whether to put in more or less money each month.

However, anytime you make any changes to your portfolio, make sure they remain diversified enough to maintain a risk level according to your risk profile as an investor.

6. Keep taxes in mind, but don’t overthink it

While it’s important to be reasonably concerned about taxes, you shouldn’t overthink it. You should reasonably try to minimize tax liability, but it should be secondary to investing and achieving high returns.

So, avoid the mistake of becoming overly paranoid about taxes and putting tax concerns above all else.

Wrapping Up

The most surefire way to make money in stocks is to buy shares of high-quality companies at reasonable prices and then hold on to the shares until you make profits. This long-term strategy allows you to produce great investment results, even if you experience some volatility along the way.