"Our favorite holding period is forever."
Investing for the ultra-long term can be one of the most powerful strategies for success. When buying the right companies, the longer your holding period, the higher your chances of successful results. Companies with strong and sustainable competitive advantages add value in the long term regardless of external conditions, and this puts time on your side when investing in this kind of business.
Berkshire Hathaway (BRK.B -0.65%) (BRK.A -0.69%) is probably the ultimate candidate to buy and hold forever. The company is a collection of high quality businesses carefully selected by Warren Buffett himself through the decades, and it offers exposure to a variety of sectors including insurance, railroads, consumer, industrials, financial services and utilities among others.
Quality and diversification make Berkshire Hathaway a top notch core holding of any long-term portfolio, even if investors are understandably concerned about Buffett´s succession. The Oracle of Omaha is already 83 years old, so the transition is a risk to consider in the medium term.
Berkshire´s operating subsidiaries are managed quite independently by their respective management teams, so there won´t be many changes after Buffett is gone. But investment management is a critical area in which Buffett is irreplaceable.
On the other hand, Buffett himself has admitted that he can no longer generate the same kind of returns he produced when he was managing a smaller portfolio. Size is a big limitation to portfolio returns at this stage, so Berkshire won´t necessarily generate much lower returns from investments after Buffett is gone.
Every one of Berkshire´s holdings has been selected based on its sustainable competitive advantages, and the sum of all those companies adds the benefits of diversification to the mix. Unfortunately, Buffett won´t live forever, but Berkshire is built to last.
Coca-Cola (KO -0.29%) is not only one of Berkshire´s biggest holdings, it has traditionally been considered a paradigmatic example of Buffett's investment philosophy, and for good reason.
The most critical aspect to consider when looking for a company to hold forever is competitive advantage: Coke enjoys unparalleled brand recognition and a gigantic global distribution network that sets it apart from the competition and would be almost impossible to replicate by new entrants. Economies of scale and abundant financial resources are extra sources of competitive strength for the company.
Soda consumption in developed countries has been stagnant lately due to market saturation and changing consumer habits toward healthier nutritional standards. But Coke is adapting to these changes with healthier products like its Dasani waters and Powerade sports drinks, consumer tastes may change over time, but Coke has the strength to remain the leading player in its industry for the long term.
A magic company
Disney (DIS -1.48%) benefits from its tremendously valuable intellectual property, which sets it apart from the competition. The company owns brands like ABC, ESPN, and Pixar among others, and it has the rights to profit from an amazing portfolio of fictional characters, from Mickey Mouse to Darth Vader, going through many of the most popular and recognizable names in the industry.
Disney has the ability to monetize its characters and franchises across multiple platforms: movies, shows, home videos, theme parks, merchandising etc. This provides a lot of leverage when it comes to making money from its properties, and it´s an unparalleled advantage in the media and entertainment industry.
Even if discretionary spending can be cyclical, Disney is an intergenerational company which has successfully gone through all kind of economic scenarios in the past. Technological change is always a risk to watch, especially when it comes to the online streaming revolution, but Disney seems to be integrating quite well into the streaming paradigm.
In December of last year Disney and Netflix made an agreement giving Netflix the rights to stream new releases, including those from Pixar and Marvel, starting late 2016. Financial terms of the agreement were not officially disclosed, but analysts estimate that Disney will be receiving something in the area of $300 million per year from this deal.
While companies like Netflix, Amazon and others continue competing against each other for valuable content to add to their streaming libraries, high quality content producers like Disney stand to benefit from higher prices due to this bidding war. The streaming revolution may actually be a positive driver for companies like Disney.
Selecting investments with a long term mentality is not only a time-proven method for success, it can also provide peace of mind in times of economic and political uncertainty. Companies like Berkshire, Coke and Disney can help you beat the market over years to come while at the same time allowing you to sleep smoothly at night knowing that your capital is well protected.