When looking to build wealth in the stock market, one of the best things you can do is take a buy-and-hold approach. This contrasts with active investing, where investors look to time the market by buying low and selling high.
Buying and holding is a simple yet effective way to build wealth over time because you are buying great companies and letting your returns compound. Don't just take my word for it. Warren Buffett is a perfect example of how buying and holding for the long run can build colossal wealth.
Image source: The Motley Fool.
Since 1965, Berkshire Hathaway has generated a return of 3,600,000%, or 20% compounded annually. Buffett has held many stocks for 10 years or more, but the four I want to focus on here are Visa (V -0.59%), Mastercard (MA 0.15%), Globe Life (GL 2.68%), and Moody's Corporation (MCO 0.02%).
Visa and Mastercard: 11 years
Warren Buffett loves payment processors, which we can see from his stakes in Visa, Mastercard, and American Express.
Visa and Mastercard help customers move money seamlessly with their debit and credit card products. These companies make money by clearing transactions through their payment networks; in 2020, Visa and Mastercard were the two largest payments networks, clearing $13.6 trillion in payments volume.
What makes these two companies appealing is their high-profit margins, which generate strong cash flows. Over the last decade, Visa and Mastercard have average profit margins of 44% and 40%, respectively.
V Profit Margin data by YCharts.
Since purchasing Visa and Mastercard in 2011, Buffett has pulled in returns of 878% and 1,440%, respectively, which comes out to 24% and 27% compounded annually.
Globe Life: 21 years
Insurance companies are one of Warren Buffett's favorite places to put his money, and Globe Life has been a part of his portfolio since 2001. Globe Life sells insurance policies, including life, supplemental health insurance such as cancer and intensive care coverage, and supplemental Medicare insurance.
While insurance isn't an exciting industry, it can be a cash cow that provides good protection against inflation. Insurers have pricing power, allowing them to increase premiums if their claims costs go up too much.
The insurer also stands to benefit from higher interest rates. Globe Life has an $18 billion portfolio of investment grade, municipal, and other government bonds that will benefit from rising interest rates over time.
Since first purchasing Globe Life in 2001, Buffett has raked in a return of 599%, or nearly 10% annually.
Moody's Corporation: 22 years
Warren Buffett first picked up Moody's in 2000 when the company spun off from Dun & Bradstreet. Moody's provides credit ratings to companies worldwide and is an essential player in the fixed-income market.
The company enjoys a strong competitive advantage because the rating industry has high entry barriers. Moody's and S&P Global dominate the industry with about a 40% market share each.
Moody's benefited from a decade of low interest rates, which led to a continuous flow of corporate debt issuance. With interest rates rising, Moody's rating business may not see as much corporate debt issuance. That's where its analytics segment comes into play.
The company provides research and insights to companies, leveraging its credit, markets, supply chain, and climate knowledge, which brings in a steady stream of recurring revenue. In the first half of this year, Moody's rating business saw revenue decline 24% while its analytics business picked up the slack, with revenue increasing 20%.
Since picking up Moody's in 2001, Buffett has made 2,660%, or 17% compounded annually.
