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Charlie Munger, Warren Buffett’s longtime partner, passed away at age 99 last month. Perhaps Munger’s biggest legacy? Spurring Buffett to switch from investing in very cheap stocks to investing in high-quality businesses at reasonable prices.
That’s because whatever a stock may do in the near term or whatever its current valuation multiple, Munger taught us that over a long time period, stocks tend to return close to the return on capital of the underlying business.
In a 1995 speech, Munger said:
Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return — even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.
That’s why for investors truly looking at the long term, a focus on quality, competitive advantage, and a high return on invested capital (ROIC) is crucial to success. And it’s also why the following three tech stocks should be targets for your new investment dollars today, even after impressive year-to-date runs.
Microsoft
Microsoft (NASDAQ: MSFT) may be the second largest stock in the world, but that doesn’t mean Microsoft can’t continue rewarding shareholders. After all, Microsoft was the largest company in the world in the year 2000. Despite massive gains since then, it’s only the second-largest today. So… lots of room to grow.
Over the past 25 years, Microsoft has always had a very high return on capital by virtue of its dominant position in Windows operating systems, the Office enterprise software suite, and the Dynamics enterprise resource planning system. But over the past decade, the company has had a renaissance under CEO Satya Nadella, who took over as CEO almost exactly 10 years ago.
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Under Nadella, Microsoft has muscled its…
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