Let's be clear from the outset: there are exactly zero stocks out there you can "set and forget." Since the dawn of the Internet, the pace of change in society has only accelerated, and I don't think that will change anytime soon. As such, no incumbent is 100% safe from disruption.
That being said, there are stocks that posses three traits crucial to any good investment. Many of these traits I've derived from the writings of former trader Nassim Nicholas Taleb.
Today, we'll talk about why Amazon (AMZN -1.14%), Alphabet (GOOG 0.37%) (GOOGL 0.35%), and Chinese tech giant Tencent (TCEHY 1.91%) are all stocks you could potentially buy and hold forever. I'm so confident in these three that -- as of this writing -- they account for a combined 37% of my real life holdings.
Image source: Getty Images
Requirement #1: A wide moat with lots of experimentation
By far the most important thing for any long-term investor to research is a company's sustainable competitive advantage -- often referred to as a "moat." While there's no standard definition of a moat, in my book, it comes in four different forms:
- Network effect: Each additional user of a product or service makes it more valuable to current users.
- High switching costs: Once someone starts using a product or service, the costs -- whether overtly financial, or in terms of difficult logistics -- are onerous.
- Low-cost production: When one company can offer the same product for less than the competition, that company wins.
- Intangible assets: This includes brand value, patents, and regulatory protection.
Often, a company is lucky if it has just one of these moats. Rarer are those that have multiple. But one of the things that makes all three of these companies so valuable is that they have enormous moats.
| Moat | Amazon | Alphabet | Tencent |
|---|---|---|---|
| Network Effect | Each additional customer to Amazon incentivizes third-party vendors to use Fulfillment by Amazon | As more people use Android OS, third-party app developers are motivated to build apps for it. | The WeChat app might have the strongest network effect in the world right now. |
| High Switching-Costs | Amazon Prime is a deal that can't be found anywhere else. | Once your Gmail is set up, and you sign in to third-party sites using your Google identity, it's a pain to switch. | As WeChat continues to integrate new functionality -- like payment systems -- switching costs are rising. |
| Low-Cost Production | Amazon's network of fulfillment centers guarantees quick delivery that others can't match. | With seven products with over one billion users each, Alphabet produces data for use in targeted ads that others can't match. | As with Alphabet, Tencent's data on over one billion WeChat users and all of its gamers makes for an advertising gold mine. |
| Intangible assets | Amazon has tons of patents, and Forbes rates its brand as the world's sixth-strongest. | Alphabet also has many patents, and is rated by Forbes as having the second-most-valuable brand globally. | Along with patents, BrandZ rated Tencent as the eighth-most-valuable brand in the world. |
Equally important, none of these companies is resting on its laurels. They are adopting optionality: the approach of tinkering with low-risk, high-reward experiments.
This is what transitioned Amazon from an online bookstore to the e-commerce, content-producing, package-shipping conglomerate that it is. Alphabet's Google[x] is chasing after moonshots. And along with its own tinkering, Tencent has used its extra cash to invest in several other Chinese and international upstarts.
The wide moat protects from competition, and the tinkering opens up the possibility of huge new avenues for growth -- with comparatively little downside.
Requirement #2: Financial fortitude
This is a measure of what would happen to a company's prospects -- over a decades-long time horizon -- if an economic crisis hit right now.
Generally, three different things can happen:
- Fragile companies -- which have little cash, lots of debt, and weak cash flows -- will struggle to stay afloat.
- Robust companies -- which have healthy war chests, moderate debt, and moderate and reliable cash flows -- will emerge largely unscathed.
- Antifragile companies -- with enormous cash balances, low debt, and huge cash flows -- will grow stronger. They can buy back their own stock on the cheap, acquire distressed start-ups, or bleed out the competition by undercutting them on price.
One look at the financial statements of these three shows that they are all very antifragile.
| Company | Cash | Debt | Free Cash Flow |
|---|---|---|---|
| Amazon | $31 billion | $25 billion | $6.5 billion |
| Alphabet | $110 billion | $4 billion | $24 billion |
| Tencent | $48 billion | $21 billion | $15 billion |
Data source: Yahoo! Finance. Tencent IR. Cash includes long and short-term investments. Figures -- with the exception of Amazon's FCF -- rounded to nearest whole number. Tencent's numbers calculated using exchange rate of 1 RMB = $0.16
Amazon is admittedly the weakest of the bunch here. But it's worth noting that much of the debt was only recently added as a result of the Whole Foods acquisition, and if a crisis were to hit, all the company would have to do is hit the brakes on its reinvestment and it would be fine.
Requirement #3: Skin in the game
Finally, we have an aspect often overlooked. If a company is run by a founder, that person often has his/her "soul in the game": the company is an existential extension of their being. If they were just in it for the money, they would have sold out after the IPO.
But just in case they are motivated by cash, their huge holdings of the stock provide a disincentive from making businesses decisions that could affect the long-term viability of the business.
As you can see, all three of these companies are still run by their founders, and all of them have management teams with significant skin in the game.
| Company | Founder/CEO | Management Stake | Value of Stake |
|---|---|---|---|
| Amazon | Jeff Bezos | 17% | $118 billion |
| Alphabet | Larry Page | 58% (voting power) | $46 billion |
| Tencent | Pony Ma | 9% | $47 billion |
Data source: SEC filings. Amazon and Alphabet accurate as of most recent DEF 14A. Tencent stake accurate as of most recent annual report. Percents rounded to nearest whole number
I believe that when you combine these three facets -- wide moats with optionality, financial fortitude, and skin in the game -- you have found stocks that are as close to "buy and hold forever" as you can get these days.
They're all worthy of your investment dollars. My skin is solidly in this decision, and I think you should consider putting yours in as well.
