Goldman says ‘buy and hold’ investing is broken, but this new strategy will work

• Goldman Sachs says the returns from owning and holding quality companies have "fallen markedly."
• The firm recommends its new strategy of investing in companies with improving levels of return on capital, which is a measure of how effectively a company can turn capital into profit.

Goldman Sachs told clients that the environment is more difficult for picking stocks of quality companies, and as a result, investors should be willing to accept longer holding periods and hold fewer stocks.

"Buying and holding" quality companies with high returns on capital, a measure of how effectively a firm can turn capital into profits, worked from 2005 to 2011, he said. The top 20 percent of companies as measured by return on capital outperformed their sector by 13.1 percent per year in that time period. However, the same strategy only beat its peers by 2.5 percent per year from 2010 to 2016.

The strategist said returns have suffered because companies invested less, which led to lower sales growth. For example, the three-year trailing sales growth for the top 20 percent of companies as measured by return on capital went from 11 percent per year from the 2007 to 2009 and 2011 to 2013 time periods to 6 percent per year from 2014 to 2016.

As a result, Goldman made some key changes to its strategy.

"While maintaining our bedrock focus on competitive advantage … we prioritize growth and positive momentum in returns on capital – companies which won't just maintain high returns but also expand them," he wrote. In addition, the firm reduced the size of its recommended list as its analysis revealed that funds with fewer total positions have done better over time.

These are the new 6 stock picks:

1. Facebook - 31.9%
2. Amazon - 21.5%
3. Marriott - 15.6%
4. Equinix - 14.3%
5. Visa -  13.3%
6. Signature Bank - 11.1%

Source: Bloomberg Pro Terminal

Trader - S. Fuchedzhiev

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