As a long-term investor, I like the timeframe of decades I have in which to invest my Self-Invested Personal Pension (SIPP).
But while time can be the friend of the long-term investor, it can also multiply the cost of some mistakes.
For example, a small-seeming annual charge or account management fee can suddenly look big when taking a 20- or 30-year view.
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Here are three things I think an investor should look for when finding shares to buy for their SIPP, to try and help time be their friend rather than their enemy.
1. Ongoing business relevance
Times change – and so do industrial and consumer needs. Once-mighty businesses fade away.
If you doubt that, just have a look at the some of the companies that have featured in the FTSE 100 over the past four decades.
PC maker Amstrad? Paper miller Arjo Wiggins Appleton? Trident jet manufacturer Hawker Siddeley?
None now exist as independent companies.
But other businesses that have been in the FTSE 100 from day one do, including J Sainsbury, Shell, and Unilever (LSE: ULVR).
Predicting long-term business trends can be difficult. But some areas (like food retail and energy provision) are likely here to stay for the long term one way or the other, I reckon.
So when buying shares for a SIPP, I think a savvy investor will ask whether their target share’s business area looks likely to endure over the long run.
2. A sustainably great business needs a competitive advantage
But just because a business area endures, that does not mean that specific firms will hang around.
To differentiate itself from rivals, a business needs some form of competitive advantage.
I think Unilever is a good example here.
It owns a range of premium brands like Hellmann’s and Dove that help set its products apart from unbranded rivals. It also owns unique products such as Marmite as well as having developed proprietary product formulations and having a huge global distribution network.
That does not necessarily mean it is a consistently strong business, by the way. Ingredient inflation can eat into profit margins while having three chief executives in under two years could mean that business performance in coming months and years is unsettled.
Indeed, while I would happily buy Unilever shares for my SIPP at the right price, for now the company is too pricey for my tastes given such risks.
But the company does illustrate in bucketloads something I look for when finding shares to buy for my SIPP: a sustainable competitive advantage.
3. Valuation, valuation, valuation
It may seem surprising that I am unwilling to buy Unilever shares even though I like the company.
But most people would not buy a car or home they liked if they felt it was not attractively priced.
For me, it is the same with investing. A good business does not necessarily equate to a good investment. In fact, it can be a terrible one. It depends on what one pays to invest in it.
That is why, when assessing possible shares to buy, I always ask whether they are attractively valued.
