One of the most difficult things in investing is holding an investment for the long term. Buying is arguably quite easy, but holding tenaciously requires a whole different skill set.
This is likely due to several reasons. First, only a high-quality company's shares could and should be held for the long term. So this largely eliminates companies with a highly uncertain long-term future. Second, holding a stock for the long term requires a surprising amount of effort.
Indeed, holding a stock requires a new decision every day -- the decision not to sell. This daily decision is made even as negative economic, industry, and company-specific headlines arise from time to time.
If you think deeply and long enough about the idea of tenaciously holding a stock for the long term, you'll likely conclude that it's easier said than done. In addition, you might realize what I did: This investing approach requires a very high bar for the types of companies that make it into your portfolio in the first place.
After all, if you're not investing in a durable market leader with a proven competitive advantage and a somewhat predictable business, how would you expect to hold through all of the company's future challenges? And how about all of the other shiny investment opportunities that compete for your attention?
Two stocks I'm betting big on
With all of this said, there are only a few stocks I'd give my stamp of approval to as great long-term investments. The first may not be surprising: Berkshire Hathaway (BRK.B -0.69%) (BRK.A -0.76%). The conglomerate gives investors access to a diversified selection of well-managed, high-quality assets.
Of course, it's not exceptionally bold to call out such a diversified business as a great buy-and-hold opportunity. So it's my second choice that I want to spend more time explaining in this article: Costco (COST 1.01%).
Costco: Built to last
The intensely focused retailer is a great long-term investment for three simple reasons. First, Costco's low SKU count, low-price, membership-based business model is resilient.
Perhaps the most important element of Costco's business model is its stock-keeping unit (SKU) count. Its annualized sales of approximately $240 billion are divided across just 3,800 SKUs. This gives the company significant negotiating power with suppliers -- and Costco uses it to obtain low prices when buying. It then passes the bulk of those savings onto customers, giving them low prices. This negotiating power and high volume per SKU also mean that Costco gets high priority from suppliers when supply chain challenges arise.
Further, the company's membership model helps Costco create long-term, loyal customers. This membership model also means Costco isn't as reliant on product pricing as retailers that don't have membership models. A steady stream of membership-fee revenue helps offset challenges that arise in product pricing.
Second, Costco has a strong balance sheet, with about $14 billion of cash, cash equivalents, and short-term investments. This is more than twice as high as its long-term debt. Considering that many retailers operate with more debt than cash, Costco's profitable business model is well-positioned to handle almost any challenges it may face.
Finally, unlike Berkshire Hathaway, Costco pays a dividend. Though its dividend yield of 0.8% today may seem small, investors should keep two things about this dividend in mind.
First, Costco has a long history of increasing its dividend every year. Second, the company occasionally pays out a large special dividend on top of its regular dividend.
For instance, its last special dividend was paid out in 2020 in the amount of $10. This was 14 times greater than the quarterly dividend Costco was paying at the time.
Given that Costco has been rewarding shareholders with special dividends every two to three years, another one is likely coming soon. Importantly, a good dividend helps make it psychologically easier for investors to hold onto shares during volatile and uncertain periods.
Overall, Costco's resilient, dividend-paying business represents the type of company I don't mind buying shares of and holding tenaciously for the long haul. What it lacks in Berkshire-like asset diversification, it makes up for in a robust balance sheet, a relentless focus on providing both members and shareholders value over the long term, and a good dividend.
