Investing in stocks can be one of the most enjoyable ways to make money -- especially when the stocks in your portfolio can be left alone for decades. Fortunately, this approach also happens to be the way famed investor Warren Buffett has made the bulk of his fortune. He buys shares of excellent companies -- or buys them outright -- and holds them for a very, very long time.
In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.
The question, therefore, is: What companies have "outstanding businesses with outstanding managements"? After all, this is the criterion Buffett says these long-term holdings should possess.
Here are three companies that fit the bill:
When it comes to grade-A management of publicly traded companies, most Starbucks' stakeholders would likely concur that Starbucks (NASDAQ:SBUX) CEO Howard Schultz should be counted among the best. And Starbucks employees seem to agree; the CEO has an 89% approval rating from employees who posted an opinion on Glassdoor.
Schultz demonstrated his prudent leadership when he played a critical role in the company's turnaround following a period between year 2000 and 2007 when Shultz had stepped out of the CEO position and the company was struggling with a short-term orientation under the company's CEO at the time. After returning to the CEO position, the Starbucks' revenue, net income, and stock price all turned upward as Shultz focused the business on long-term, customer-centric initiatives.
As far as Starbucks' business itself goes, the company benefits from a significant competitive advantage, built by its powerful brand power and economies of scale in its distribution. This advantage is evident by the company's consistent ability to maintain robust profit margins near 60%.
Berkshire Hathaway's Warren Buffett sets the gold standard in capitalistic stewardship. The company's famous "Owner's Manual" details the attitudes that make Berkshire Hathaway's management so shareholder friendly. Here are some excerpts from the company's business principles laid out in the manual that describe management's approach.
- "We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own the assets."
- "In line with Berkshire's owner-orientation, most of our directors have a major portion of their net worth invested in the company. We eat our own cooking."
- "We use debt sparingly and, when we do borrow, we attempt to structure our loans on a long-term fixed-rate basis. We will reject interesting opportunities rather than over-leverage our balance sheet."
Berkshire's management has relentlessly abided by these principles for decades.
With management so focused on the long-term, Berkshire Hathaway's business is built on sustainability, made up primarily of a diversified group of world-class, cash generating assets.
Whole Foods' (NASDAQ:WFM) CEO John Mackey played a key role in popularizing the term and movement of "conscious capitalism." Conscious capitalism, Mackey contends, balances business and social impact, making the two inseparable.
"In my business experience, profits are best achieved by not making them the primary goal of the business" Mackey said in his book, Be the Solution: How Entrepreneurs and Conscious Capitalists can Solve the World's Problems, which he co-wrote with Michael Strong.
Rather, long-term profits are the result of having a deeper business purpose, great products, customer satisfaction, employee happiness, excellent suppliers, community and environmental responsibility -- these are the keys to maximizing long-term profits. The paradox of profits is that, like happiness, they are best achieved by not aiming directly for them.
Investing in Whole Foods gives investors a stake in not only the world's most powerful brand in the whole foods grocery store industry, but it gives shareholders a stake in a company focused on the simultaneous pursuit of return on capital and social impact.
These three stocks represent a great starting point for investors looking for low-maintenance stocks to buy-and-hold for decades.