Ten Stocks for the Next Ten Years

My long-term portfolio has posted impressive returns, partly because I don't buy and forget. Here are ten stocks I like now for the next decade, and five that I'm dropping.

This "pick ten stocks for the next ten years” thing is a piece of cake.

All you have to do, it turns out, is start your picks in the bottom of a bear market but close to a recovery, then ride out the next ten-year bull market, right?

It's working out well so far for the Jubak Picks 50 long-term portfolio launched on Dec. 30, 2008. You'll remember that the stock market bottomed in March 2009. My portfolio soared for a 57.8% gain 2009. And it posted a 20.1% gain in 2010.

Compounded, the two-year gain of 89.5% on that long-term portfolio compares to a 45.6% gain for the Standard & Poor's 500. (The S&P gained 26.5% in 2009 and 15.01% in 2010.) Each year I review it with a handful of buys and sells—and use it to come up with a list of ten top long-term buys for right now.

There are just two potential glitches that I can see with this approach. (And they're really, really, really small.)

Bulls Are Fickle Beasts

First, as anybody who invested through the bear markets that began in 2000 and 2007 knows, you can't count on getting a ten-year bull market when you need one. Comes along a year like 2008, and quicker than you can say "Hank Paulson," the S&P 500 is down 37%. That's enough to take the gloss off any long-term portfolio.

Second, even when the stock market as a whole cooperates, sometimes even good companies go bad before those ten years run out. Monsanto (NYSE: MON), once the undisputed star among seed companies, was down 13.5% in 2010, and any investor now has to wonder when the company might get its mojo back.

It's those two glitches that inform the strategy for the Jubak Picks 50. This long-term portfolio does indeed look for stocks that you might well profitably hold for ten years or more, but it recognizes that markets and companies change. And that you might need to tweak even the best long-term portfolio once a year or so.

As I wrote when I reported on this portfolio a year ago, buy-and-hold investing isn't dead, but its DNA sure could use a bit of genetic engineering.

"Buy and hold" was never supposed to be "buy and forget," but a great bull market like the one that stretched from 1982 to 2000 made it seem like all an investor had to do was buy, then remember to add up the profits from time to time.

The bear markets that began in 2000 and 2007 demonstrated exactly how dangerous buy-and-forget can be. In the first bear, from March 2000 through October 2002, the Standard & Poor's 500 fell 48%. In the second, which began in October 2007 and bottomed in March 2009, the S&P 500 lost 56%.

Experiencing those two bear markets has left many investors reluctant to buy stocks at all. And it's left most of those willing to buy stocks as skittish as whitetail deer in hunting season: Never able to relax and always ready to bolt for escape. The flow of money out of equities, as measured by the flows in and out of stock mutual funds, didn't reverse until the fall of 2010.

Think Long Term, But More Often

But the original advantages of long-term investing aren't extinct. Long-term investors can still take advantage of temporary panics and mispricings to build positions at low costs. They can still put time to work for them by buying the stocks of companies with a high return on invested capital and letting those companies compound those returns over the years. They can still catch long-term trends that can power a company's stock for years without being sidelined by worries about catching the best price.

All that "buy and hold" needs is a transformation from "buy and forget" to "buy and review." Even a review as infrequently as annually will do the trick, I believe.

So, at the beginning of each year, I pick five stocks to drop from the portfolio because these companies haven't run their businesses the way I want them to for a long-term portfolio holding. I replace shares of those five companies with shares of five companies that I think demonstrate what it takes to be a stock winner for the next ten years.

NEXT: My Simple Rules for When to Buy and Sell

When I Buy and Sell

In these buys and sells, I'm not trying to reinvent the wheel; I'm using rules developed by long-term investors—rules that have served them well over the years.

The buying rules involve looking for companies with:

• A lasting competitive edge. Morningstar calls this edge a "wide moat." Peter Lynch famously advised looking for businesses that even an idiot could run, because one day an idiot will. Other long-term investors, including Warren Buffett, look for companies that have built up the value of a brand name, assuring their continued dominance in a given market.

• A return on invested capital that's higher than those of competitors. This is insurance, because it means that a company will have lots of profits to reinvest (at a higher-than-average rate of return) in staying at least a step ahead of competitors.

• A strong history of research and development (or acquisition and development). This demonstrates that a company doesn't fall asleep at the switch, knows how to press its advantage over competitors, and can manage the changes that sweep through all parts of the global economy with increasing power these days.

• A conservative management style that can balance risk—because companies don't survive for the long term unless they take risks—with safety. Things can still go wrong at companies like these, but conservative management avoids bet-the-company gambles. It has the ability to recognize long-term global economic trends and to ride them even at the cost of disrupting the company's existing business.

And the simple selling rules include:

• Sell when the reason you bought the company in the first place no longer applies. Let's say the long-term trend that the company was riding has turned in a direction the company didn't expect—or dissipated entirely. There's no use investing in even the world's best buggy-whip company when cars are replacing horses. Or say the larger macro picture—for a market or for an economy as a whole—heads south. No use investing in cars, even if they are replacing horses, if a financial panic makes it impossible for customers to get loans to buy horseless carriages.

At the same time as I pick five stocks to add and five to drop, I name five more I think are especially appropriate now—that is, in 2011—for any portfolio, buy-and-hold, buy-and-review, whatever.

The result is ten top stocks for the next ten years.

(To see the entire list of 50 picks for the long term, go here. For more on the broad themes that guide these picks, see my 2008 book, The Jubak Picks. You'll see an ad and an easy way to order the book from my blog, The Jubak Picks.)

Let the Cutting Begin

So which companies get the ax as we start 2011?

Ctrip.com International (Nasdaq: CTRP): I added this Chinese Internet travel company to the Jubak Picks 50 in January 2010. And it was a big mistake. I missed major changes in China's travel market that were making Ctrip.com's huge market share less valuable. Travel companies were cutting the fees that they paid to Ctrip and its competitors, so while Ctrip was still growing, that growth wasn't as profitable as expected. Even in long-term investing, it's good to admit a mistake early. And that's what this was. The pick gained 12.6% in 2010.

Embraer (NYSE: ERJ): This Brazilian maker of regional and business jets had a great year—the stock returned 36.4% in 2010—but the aircraft market is shifting under the company's feet. And more quickly than I expected. China is determined to build a domestic aircraft industry, and it's making fast progress. Commercial Aircraft of China now has 100 orders for its narrow-body C919 passenger jets. (Although as Airbus and Boeing (NYSE: BA) know, taking orders is easy; delivering planes is the hard part.) The C919 is more of a threat to Boeing and Airbus, granted, but I don't want to be in the path of a government-supported Chinese aircraft industry, thank you.

Jacobs Engineering Group (NYSE: JEC): Recessions—especially great big, global recessions—test companies, and investors get to see which companies handled the bad times best. I don't think Jacobs Engineering did a bad job during the recession; the company, in fact, did a good job of holding onto core clients. I just think some other infrastructure engineering companies have done a better job of preparing for the post-recession world. Think of this sell of Jacobs Engineering as a decision to upgrade. The stock was up 21.9% in 2010.

State Street (NYSE: STT): State Street's involvement in the global financial crisis didn't do the company any good, and it's taken the company longer than I expected to get momentum back. That's what happens when you so thoroughly mismanage your own balance sheet—clients looking for somebody to manage their money think twice. This is still an amazing asset-gathering machine, with $20 trillion in assets under custody and $1.9 trillion in assets under management. But I think the asset-management and custody business will get increasingly competitive as more big financial services companies recover, and more competition always cuts into fees.

Suntech Power (NYSE: STP): 2010 was just a terrible year for solar power companies as economic and financial crises in the United States and, more importantly, in Europe cut into government subsidies for solar power. The winners in a solar power game where capital is the key are Chinese companies. At one point, I thought Suntech was about to step out in front of the Chinese industry on its technology and manufacturing. I now think there are better picks in China. This stock was down 45.8% in 2010.

The Terrific Ten

And now for the fun part. Putting together my 2011 list of ten stocks for ten years.

Here are the five long-term picks already in the portfolio that I think will do best in 2011:

• Bunge (NYSE: BG), the big global buyer, seller, storer, transporter, and processor of soybean and other oil seeds, is a stock to own in a year that's shaping up to repeat the food-price spike of 2008.

• Cemex (NYSE: CX) will see what was a handicap in 2010—the Mexican company's exposure to the moribund US construction sector—turn into an advantage. For once, Porfirio Díaz's lament—Poor Mexico, so far from God, so close to the United States—will be an advantage. (Well, at least if you're selling cement.) The stock lost 5.8% in 2010.

• Deltic Timber (NYSE: DEL) sells timber and timberland for development. Amazingly, the stock was up 22.7% in 2010. This year should be better as life gradually returns to the US housing market. (Let's say the housing market comes out of intensive care and investors conclude that the patient will actually survive.)

• Johnson Controls (NYSE: JCI) did amazingly well in 2010—up 42.3%—considering that two of the company's three businesses were in sectors of the economy that had been crushed. This year will be better for the company's auto-interior and auto-battery businesses and for its buildingwide energy-efficiency unit. 

• Rayonier (NYSE: RYN) is another timber producer with a lot of land that it was busy developing until the US mortgage crisis hit. The gradual winding down of that crisis will make 2011 a better year for Rayonier. Not that 2010 was all that bad. The stock was up 29.4%.

And, finally, here are my five adds for this year's list:

• Baidu (Nasdaq: BIDU): China's leading search engine operator has just started to tap into the market for electronic retailing.

• DuPont (NYSE: DD): With its mix of seeds and enzymes acquired (not too recently) by buying Pioneer Hi-Bred and (very recently) Danisco, I think DuPont is targeting two of the biggest technology opportunities—and challenges—of the next decade. Those are growing more food and producing more energy from plants without making the first challenge more difficult.

• Fluor (NYSE: FLR): With a choice between Jacobs Engineering and Fluor, I'd go with Fluor and its bigger backlog of orders.

• Gol Linhas Aereas Inteligentes (NYSE: GOL): Air travel is exploding in emerging economies as economic growth leads to increases in the number of people who can afford to fly. And on top of that, the low-cost domestic airline can look forward to a big increase in traffic as Brazil hosts the World Cup in 2014 and the Olympic Games in 2016.

• Yingli Green Energy (NYSE: YGE): Yingli is my choice for a horse to ride in China's solar industry.

Look for the usual sporadic updates on the stocks in this portfolio over the next year.

The mutual fund Jubak manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in stock mentioned in his columns. The fund did own shares of Baidu and Johnson Controls as of the end of November. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. The fund's holdings as of the end of December will be posted in a few days.

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at MoneyShow.com.