Long-term investors are likely familiar with Warren Buffett's declaration that his favorite holding period for stocks is "forever." While it might be impractical to hold some stocks "forever," it makes good sense to hold your best stocks for as long as possible to maximize your gains.
Johnson & Johnson
Johnson & Johnson is a stock that I'd easily recommend to all long-term investors. That's because its three core businesses of pharmaceutical products, consumer healthcare products, and medical devices are so well-diversified that it's tough for any headwinds to knock the entire company off course.
J&J seems like a slow-growth stalwart, but between fiscal 2006 and 2016 its annual revenue rose almost 35%, its adjusted EPS grew 60%, and its stock rallied nearly 90%. The company also pays a forward dividend yield of 2.5% -- which is easily supported by a payout ratio of 53% -- and it's hiked that payout annually for over half a century.
J&J certainly faces near-term challenges, including generic competition for its blockbuster drug Remicade, recalls and lawsuits targeting some of its products, and tough currency headwinds. But these challenges will fade over time as J&J develops or acquires new drugs, settles legal issues and the currency cycle becomes favorable again.
J&J is a solid core holding for conservative investors, but Amazon is a great stock for investors who can stomach more volatility. Over the past two decades the bears claimed that Amazon could never generate meaningful profit growth with its low-margin marketplace business.
But that all changed when Amazon turned AWS (Amazon Web Services), its cloud platform which powers many of the biggest websites in the world, into a high-margin profit driver. Amazon's AWS revenue rose 55% in 2016 and accounted for 9% of its top line, but its operating income more than doubled and accounted for 74% of its operating profits. That growth boosted Amazon's net earnings by 292% in 2016, and analysts expect its earnings to rise another 47% this year.
That bottom line growth enables Amazon to use low-margin or loss-leading strategies to expand its Prime ecosystem with new services, original video content, smart home gadgets, and automated solutions -- all of which will lock in more marketplace customers.
The Chinese internet industry is a volatile one with richly valued stocks, but one stock stands out as a safe long-term play: Tencent. Tencent's WeChat is the most popular messaging app in China, its market cap makes it the most valuable company in Asia, and its gaming portfolio makes it the biggest video game company in the world.
Tencent's WeChat has 846 million monthly active users (MAUs), its older QQ chat platform has 877 million MAUs, its popular online game League of Legends has over 100 million monthly active players, and 100 million people play its subsidiary Supercell's games (including Clash of Clans) every day. Its WeChat platform -- which lets users play games, order products, hail cabs, make payments, and perform other tasks within the app -- is also considered China's largest social network.
Tencent is 18 years old, but its growth isn't slowing down. Analysts expect its revenue and earnings to respectively rise 50% and 51% this year. When we consider that China has an internet penetration of just 52%, compared to an 89% rate in the U.S., it's easy to see that Tencent's best days could still be ahead.
The key takeaway
Short-term strategies often cause investors to miss out on some huge long-term gains. Investors who sold Amazon in the early 1990s for some big multi-bagger gains would have missed out on even bigger gains over the following years. The same could be said about Johnson & Johnson and Tencent -- so I don't plan to sell these three stocks unless I need the cash or plan to retire.