By JACK HOUGH
Warren Buffett famously said that his favorite holding period for a stock is forever. This being SmartMoney magazine's last issue, it seems a good opportunity to screen for stocks to hold, if not quite forever, for at least a decade or so.
But today's stock market seems to favor nimble traders. The S&P 500-stock index lost more than half its value and then doubled it -- all within the past five years. Facebook has been valued as low as $54 billion and as high as $96 billion, and it has only been trading since March.
Fortunately, such erratic price swings work to the advantage of long-term investors, especially those who regularly screen the market for bargains. In his 1949 classic "The Intelligent Investor," economist Benjamin Graham described Mr. Market, a character who comes to the investor's door each day looking to trade shares. Sometimes he is ecstatic, and other times, deeply depressed -- and his prices vary accordingly. An investor who does his research and keeps a cool head can make a lot of money from a trading partner like that.
The first step: Identify quality companies. Wall Street obsesses over profit growth, but more important for long-term holders is something called return on invested capital, or the return a firm earns when it sinks funds into its business. A consistently high ROIC is a sign that a company enjoys a lasting competitive advantage and that it spends its money carefully -- things that bode well for long-term returns.
Another excellent sign is a steadily rising dividend payment, which serves at least three purposes. First, it signals that management is confident about future profits. Second, rising dividends often beget rising share prices, as yield-hungry investors buy in. Third, investors who reinvest those dividends into more shares can take even greater advantage of short-term price swings, buying more shares when they are cheap than when they are dear.
Above all, the best stocks are ones that are cheap relative to fundamental measures of value like earnings and cash flow. These firms often have flaws, which is why they trade at discounts, but the discounts are often too large.
Exxon Mobil (XOM)