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What Stock Would You Hold for a Lifetime?

23092019_holding long time

What Stock Would You Hold for a Lifetime?

In a previous article, I wrote about when and why it might make sense to follow the advice of holding companies for long periods when Buffett said: “Our favorite stock holding period is forever”. It is worth digging into this further and exploring what characteristics you’d look for in a business you planned to hold forever.

Let’s consider a scenario where you plan to buy a business with your retirement fund that you are unable to sell for 50 years (not forever, but close enough). The reason for wanting to hold this investment for such a long period is the opportunity to buy a so-called “compounder” – a business that is able to employ capital at high rates of return – and to enjoy the compounding effect of growth on the value of your investment. But how do you know which stock to choose?

There are over 3,500 publicly-listed companies in the U.S. alone. Within this group some companies will cease to exist within that 50-year time-frame, many will muddle along, and some will perform well. Only a very select number of companies will be able to compound capital at attractive rates of return for a multi-decade period. As we learn in Economics 101, excess returns in an industry attract capital from other firms, and those returns get competed away, and so does the opportunity to achieve outsized investment returns. So then what should investors look for to avoid an investment that’s likely to do poorly?

If we were to think about what would be needed to tilt the chances of this investment being a success in our favour we could narrow it down to a company that:

  • (i) has a durable competitive advantage/business moat. This could refer to a low-cost/scale advantage, network effects, or high switching costs. Essentially you want to find an industry where there are enormous barriers to entry and the asset/market positioning the firm has built up is very hard to replicate.
  • (ii) sells a product or service that is a high value component to an overall process, but also a low cost. This is the so-called “Jesus nut” on a helicopter – the bolt at the top of a helicopter propeller shaft that holds all the flying parts together. It’s called that because if it fails, the helicopter would detach from the rotor, and only thing the crew could do is pray to Jesus. This is obviously a mission critical component, but also an infinitesimal cost of the overall helicopter, which makes the component less likely to be substituted out for a competing product on the basis of price alone. These businesses also tend to have better pricing power over time.
  • (iii) has the ability for its economics to improve over time. A business whose costs move in perfect tandem with its revenue line will obviously benefit much less than a firm that’s growing its revenues with a fixed cost base. Said in a technical way, businesses that earn high incremental margins and have the opportunity to improve the economics of the business (fixed cost leverage) are favourable to own.
  • (iv) has low levels of debt. Even the best business can be destroyed if it is saddled with too much debt. Virtually all businesses exhibit varying levels of cyclicality (although to greatly varying degrees), so it’s advisable to look for companies with at most only modest levels of leverage.

With this in mind, what company would you choose if you had to hold it for 50 years, and why do you think it’s likely to perform well over that period?

INVEST WITH MONTGOMERY

George joined MGIM in September 2015 as a Research Analyst. Prior to joining MGIM, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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25 Comments

  1. Not a single business, but my vote is investing in a low cost index fund tracking large cap businesses (i.e. a casino: where the impatient are the punters, and the patient are the house).

    To your points:

    (i) (competitive advantage / moat) a growing number of large institutions with growing balance sheets (often government mandated) needing to allocate funds. Added competition increases investment in the underlying market, which drives share prices (and capital gains) up;

    (ii) (product or service that is high value to overall process at low cost) high value to large institutions (and the general public) chasing passive yield, with a relatively low fixed cost;

    (iii) (ability for its economics to improve over time) investment in the market is becoming easier with technology; and overall markets grow as investment grows (essentially driven by human’s emotional drive for profit). Growth is almost entirely detached from cost. Where the system fails in the short term, humans just tweak it to make it grow again; and

    (iv) (low levels of debt) usually none.

  2. This is a tough one. In Australia, I would choose a stock I have held for 25 years already, i.e. CSL.
    Worldwide 3 come to mind; Microsoft in North America, Tencent in Asia and perhaps Bayer in Europe. I think these companies will sell products we will still use in the next few decades. Tencent may morph into a different company selling different products, but it is nimble enough to change with the market.

  3. Top 4 for mine are:

    1)Google – Their biggest advantage is their data and they will be ahead of the curve on all of societys trends for the next 50 years.
    IMO, they’ll protect their business model via buying (paying massive overs) for any business who remotely threatens them. Through their data they will likely see a competitors threat before their competitor even knows they are a threat.

    2) Macdonalds.
    3)Amazon.
    4)visa

  4. 50 years is a long time.

    Maybe a way to look at it is to look back 50 years ago to 1969 and look at companies that you could have bought then and hold all the way until today and be very happy with the return on your investment. Then as then ask was there something that these companies had in common that could have helped you idnetify them in 1969 as a company to hold for 50 years. Then can we apply that today.

    The difficulty is that a company may appear to have a durable competitive advantage but technology changes over 50 years could destroy that.

    • Correct. The difficulty with any business that earns outsized returns is the fact that competitors will attempt to take a slice of those returns. Technology has served to level the playing field in countless sectors, lowering the barriers to entry and making incumbents vulnerable to competition.

  5. Two spring to mind on the ASX. CSL for growth and Washington H. Soul Pattinson for dividend growth.
    The track record of both companies is notable and the moat of CSL is considerable.

  6. Can’t give a good answer for equities but can for land.

    Take: land that has value because it is pleasurable location – away from urban centres.

    (i) has a durable competitive advantage/business moat. Tick – locations cannot be replaced
    (ii) sells a product or service that is a high value component to an overall process, but also a low cost. Not really.
    (iii) has the ability for its economics to improve over time. Yes, if infrastructure and amenity around the land naturally improves.
    (iv) has low levels of debt. Yes, providing the investor buys it outright.

    All this depends on the 50 year outlook for the cities, are the cities likely to keep improving or are they going to become increasingly unpleasant locations?

    • Purchasing property has made many Australians rich, but like virtually all investments, the success in the long run depends on the price you pay. It’s worth looking at what happened to Japanese land owners who purchased at the peak of the asset bubble in the early 1990s.

  7. AVH ticks my box, having held it for 17 years, provided no Vulture Capital group seizes control.
    I note Montgomery funds must have found some similar likes as they invested in it last year!

  8. With this in mind, what company would you choose if you had to hold it for 50 years, and why do you think it’s likely to perform well over that period?

    It would be good to see what you are going to say. So are you going to answer your own question?

  9. Hi George

    I would pick PFIZER – We are all living longer and medicinal drugs and therapies play a big part in that.

    • Hi Max,
      Interesting pick. There’s an ageing demographic tailwind but a question mark over the regulatory environment and the ability for pharma companies to price up their drugs the way they have in the past.
      Regards,
      George

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