When constructing a long-term investment portfolio, the primary goal is to select companies that can provide consistent growth and value over time. Unlike short-term trading strategies, long-term investing focuses on solid companies with reliable earnings, a stable business model, and a strong growth trajectory. This approach mitigates the risks of volatility and allows investors to capitalize on the power of compounding returns over extended periods.

Key Characteristics of Companies to Include in a Long-Term Portfolio

For a company to be suitable for a long-term portfolio, it should exhibit a combination of growth, stability, and value. More specifically, investors should seek companies that show consistent revenue and profit growth, while maintaining a reasonable valuation relative to their earnings. Here’s why these attributes matter:

1. Consistent Revenue Growth: A company’s ability to generate steady revenue growth is crucial. It indicates that the business is effectively navigating its industry, expanding its market share, and scaling its operations. Companies with growing revenues are more likely to weather economic downturns and take advantage of emerging opportunities.
2. Sustained Profit Growth: Profit growth is equally important as revenue growth. Companies that manage to grow their profits consistently, while keeping costs under control, often have superior management teams and scalable business models. Additionally, strong profit growth indicates that the company is effectively converting revenue into shareholder value.
3. Reasonable Valuation: A company’s valuation should be in line with its earnings potential. It’s essential to assess whether the price you’re paying for a stock is justified by the future earnings growth prospects. A company that’s overvalued can pose a risk to investors, even if it’s growing, as market corrections could lead to significant losses.
4. Financial Health: Mature companies tend to have strong financial foundations—low debt-to-equity ratios, solid cash flows, and a healthy balance sheet. These companies are better equipped to handle economic fluctuations and make strategic investments to further their growth.

The goal of investing in such companies is not only to generate capital appreciation over time, but also to secure dividend income from companies that reward shareholders with regular payouts. This combination of growth and income offers a robust way to build wealth over the long term.

The Case of Puig: An Example of Growth and Stability

A perfect real-world example of a company that fits this profile is Puig, a Spanish company specializing in the luxury goods and fragrance sector. With an impressive portfolio of iconic brands like Paco Rabanne, Jean Paul Gaultier, and Carolina Herrera, Puig has demonstrated impressive and consistent growth over the years:

• 2021: Revenues of €2.6 billion, net profit of €234 million
• 2022: Revenues of €3.6 billion, net profit of €400 million
• 2023: Revenues of €4 billion, net profit of €465 million

In 2024, Puig is projected to reach €4.8 billion in revenues and €516 million in net profits. These figures highlight consistent revenue and profit growth, a key characteristic of a company well-suited for a long-term investment portfolio.

Beyond just the numbers, Puig’s ability to grow its brand portfolio and expand into new markets demonstrates its capacity for sustainable growth. The company has successfully weathered global challenges, including economic downturns and shifts in consumer preferences, which speaks to the resilience of its business model.

Distinguishing Between Mature Companies and Startups

While Puig exemplifies the kind of mature company that can form the backbone of a long-term portfolio, startups offer a different investment proposition. When it comes to startups, their business model, financials, and growth potential are not yet fully proven, making them inherently riskier investments.

Startups, by nature, involve significant uncertainty and potential volatility, which makes them more speculative. They can offer higher returns, but at a higher risk. These companies may be in the early stages of product development, market penetration, or organizational growth. Therefore, their growth potential is based on future success, not on a proven track record of sustained performance like a mature company.

Why Startups Are Different, but Not Excluded

So, does this mean startups should be avoided altogether? Not necessarily.

While mature companies are typically the foundation of a long-term portfolio, startups can still play a role, particularly if they show exceptional promise. The key difference is that investing in startups requires a different mindset. Investors should be willing to accept the higher risk associated with startups in exchange for the potentially higher returns. These companies might not generate steady profits or revenues in the short term, but their innovative business models or disruptive technologies could yield substantial returns if they succeed in capturing market share.

Therefore, startups should not be excluded from the conversation entirely. They can still be part of a diversified portfolio, but with the understanding that they represent a higher-risk component. For a balanced long-term strategy, an investor may choose to allocate a portion of their portfolio to startups with significant growth potential while maintaining a solid core of mature companies that provide stability and consistent returns.

Building a Balanced Long-Term Portfolio

When constructing a long-term portfolio, the aim should be to achieve a balance between growth, value, and risk management. Investing in mature companies that have already proven their ability to generate stable profits is an excellent foundation. However, allocating a small percentage of your portfolio to carefully chosen startups can provide the opportunity for higher returns, as long as the investor is prepared for the inherent risk.

By focusing on companies with steady growth, a reasonable valuation, and strong financial health, investors can build a resilient portfolio that is designed to grow and withstand market volatility over the long haul.

In the case of Puig, we see an example of a company that combines consistent revenue and profit growth with a solid financial foundation—making it an ideal candidate for a long-term investment. But at the same time, we must acknowledge that startups, while riskier, can also present attractive opportunities if chosen wisely.

In conclusion, building a long-term portfolio should center around mature, stable companies, while also leaving room for strategic startup investments—ensuring a well-rounded strategy that balances both growth potential and risk management.