There are a lot of stocks I buy because they are good investments right now. In other words, I like what the company is doing, or the value in the stock. However, I don't really know how the company will be doing in a few years, so I need to keep an eye on them and reevaluate my opinion every so often. In my portfolio, a couple of examples that immediately come to mind are Coach and Whole Foods Market.
On the other hand, some stocks I buy with the intention of holding them forever. Here are three examples from my own portfolio that meet my criteria for a "forever" investment. I'll also share what I look for when choosing this type of stock.
What makes a "forever" stock?
There are three main criteria I look for when choosing stocks I plan to hold forever. First, the business must be relatively simple. If I can't explain what a company does and how it makes its money in a sentence or two, I usually won't invest in it at all. Not only is it nice to understand what a company does, but a simple business can make money in good times and bad, no matter who is in charge.
Next, the business must be timeless -- meaning that it must be in demand always. Sure, technology has evolved, but people have always needed ways to organize their information, homes to live in, and safe places to keep their money. These industries, and others like them, are full of potential "forever stocks."
Finally, the business must have a distinct competitive advantage that will make sure it stays a great company for decades to come. For example, Coca-Cola has the advantage of being one of the most valuable brands in the world. It's extremely hard to imagine a new company producing soft drinks and taking Coca-Cola's market share.
A great business model in good times and bad
The first stock in my portfolio that I never plan to get rid of is Realty Income Corporation (O +0.22%), which easily passes all three "forever" tests that I mentioned above.
Source: Wikipedia.
The business model is simple: The company buys retail properties in desirable locations, and then rents the properties to high-quality tenants. And this is a business that will always be in demand. No matter how big online shopping gets, there will always be -- at least in my lifetime -- a need for physical locations for people to shop at.
Realty Income's competitive advantage is its size. With about 4,300 properties, Realty Income is one of the largest REITs in the world, and continues to grow and acquire new properties.
Perhaps the top reason I like Realty Income for the long term is the inherent stability of its business model. The tenants sign long-term leases of 15 years or more, and pay all fluctuating expenses such as taxes, insurance, and maintenance. All Realty Income has to do is collect the rent. The occupancy rate of the company's properties has never dropped below 96.6% -- currently at 98.4% -- so there is little danger of a bad economy severely affecting shareholder income.
The best at what it does
One tech stock that I think of as a "forever" investment is Google (GOOGL +1.28%) (GOOG +1.18%). Although you may think of this as more of a speculative tech company, I believe it meets the forever criteria for a few reasons.
First, although there are a bunch of side projects and smaller revenue streams, Google's main business is easy to understand: Be the largest search engine and use the massive traffic to its site to generate advertising revenue. Although the Internet is still a relatively new business, organizing information is a business that has always been needed, and will always be needed.
Nearly 70% of Google's revenue comes from its own websites -- search engine and other Google sites -- while 20% is generated from partner sites. The other 10% or so comes from Google's other businesses.
Google's massive search market share is what really makes it a forever stock. The company has a 75% share of the U.S. search market, and gets more than six times the search traffic of the closest competitor, Microsoft.
A five-star portfolio all in one stock
Last, but certainly not least, I plan to keep my shares of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) forever.
Just like the other companies, the main idea behind Berkshire's business can be summed up simply: The company's main business is insurance, and it uses the premium income collected to invest and earn even more money. And insurance is a business that will always be in demand.
Berkshire has the unique competitive advantage of a rock-star management team, including Warren Buffett and his prodigal stock pickers Todd Combs and Ted Weschler. And most of the businesses and stocks Berkshire owns also have their own competitive advantages. Among Berkshire's 45 common stock holdings are Coca-Cola, American Express, Wells Fargo, Johnson & Johnson, and IBM.
I'm not worried about the fact that Buffett won't be at the helm forever. I have full confidence that the team he leaves in place will carry out Berkshire's goals. Just in case the wrong person is put in charge, there's a safety net in place in the form of Warren's son, Howard Buffett, who will have the authority to step in if there is a problem with a future Berkshire CEO.
Finding your own forever stocks
There are a lot of stocks that could qualify as "forever stocks" other than the three on this list. In order to determine if one qualifies, try to sum up its business in a sentence or two, determine if it will be needed in 10, 50, or 100 years, and then try to identify its unique competitive advantage. If you can do all of those things, you can start building a portfolio of your own forever stocks.
