Here at the Motley Fool Singapore, we were once asked this question. “If we were to choose a stock to buy ourselves for the long term, say over 20 years, what are the basic things we need to look out for?” That’s a great question that many investors have. And for some answers, we can turn to two great investors who are well-known for holding their stocks for very long periods of time: Warren Buffett and Shelby Davis. Buffett, estimated by Forbes to be the fourth richest person in the world at the moment, made his first investment in…
Here at the Motley Fool Singapore, we were once asked this question.
“If we were to choose a stock to buy ourselves for the long term, say over 20 years, what are the basic things we need to look out for?”
That’s a great question that many investors have. And for some answers, we can turn to two great investors who are well-known for holding their stocks for very long periods of time: Warren Buffett and Shelby Davis.
Buffett, estimated by Forbes to be the fourth richest person in the world at the moment, made his first investment in fizzy drinks maker The Coca Cola Company in 1988 and has held on to its shares since. That’s 25 years and counting!
The giant US bank Wells Fargo & Co has also been among Berkshire Hathaway Inc’s stock holdings (Berkshire is the American conglomerate controlled by Buffett) since at least 1995 – that’s a holding period of 18 years or more.
Shelby Davis, though not as well-known as Buffett, is also a bona-fide investing superstar who turned his US$50,000 fortune in 1947 into US$900m by the time he passed away in 1994. And what were some of his longevity-holdings? They were Japanese companies such as Tokio Marine & Fire, Sumitomo Marine & Fire, Taisho Marine and Fire and Yasuda Fire & Marine.
These shares were insurers that Davis held on for more than three decades. His cost basis in them was an estimated US$2m and the value of his investments had grown more than 30-fold into a collective US$75m by 1992.
If we look at the stocks that Buffett and Davis have owned for a long time, despite them being in disparate industries, they do have one thing in common: their products are unlikely to ever be obsolete.
Coke makes an enjoyable and easily affordable soft-drink with a vast and powerful distribution network. It’s hard to imagine people cutting down on Coke en masse, even if questions have been raised about the negative health impacts about its product.
Wells Fargo is a bank and we would always need banks for our economy to function properly as they are a conduit through which funds are channelled to other businesses for growth.
As for insurers, their products are crucial even if it is undifferentiated. Companies have to insure against property loss and damages while individuals often insure against death, disability or serious illnesses. As long as a party needs to transfer risk to someone else, insurers will always be in business.
And if we ever need a more instructive lesson on the wealth-building capabilities of a company whose business is built on a product that would not go obsolete, we can turn to cigarette maker Altria Group Inc (NYSE: MO).
Cigarettes – though it might be unpalatable to hear for those of us who think it constitutes a major health hazard – are unlikely to ever stop selling due to its addictive nature and Altria has rode on the smoking wave to be the single best investment ever from the 1950s to the early 2000s in the USA.
In Singapore, we do not have big-name insurers, or cigarette makers. But we do have healthcare providers, banks, and supermarkets.
Illnesses, like death and taxes, are a certainy in life. After all, has anyone not fallen sick ever at any point in their lives? And when we fall sick, to the healthcare providers we go!
According to Yahoo Finance, Raffles Medical Group Ltd (SGX: R01), operator of the eponymous Raffles Hospital, has seen its shares grow by more than four-fold (adjusted for dividends and splits) in 13 years from S$0.71 at the start of 2000 to around S$3.98 currently by providing a crucial and valuable service (healthcare) whose demand will likely never wane.
Oversea-Chinese Banking Corporation Ltd (SGX: O39), being a bank that’s much needed in a globalised economy, has seen its share price jump 217% in the same time from a dividend-and-split adjusted price of S$3.21 to S$10.19 today.
Shoppers in Singapore might be very familiar with the Giant and Cold Storage brand of supermarkets. But, not many might know the company behind them – Dairy Farm International Holdings Ltd (SGX: D01), which is majority owned by conglomerate Jardine Strategic Holdings Ltd (SGX: J37). By operating supermarket stores across Asia, Dairy Farm’s shares have shot up more than 10-fold from US$0.79 (again adjusted for dividends and share splits) in Jan 2000 to around US$10.39 today.
E-commerce might have crippled bookstores and changed the music industry, but it’s also hard to envision how it might affect the shopping habits of regular folks looking to buy fresh groceries. Internet retailing giant Amazon might be inching up on the grocery space in the USA, but for Asia (where Dairy Farm’s operations are), that still seems a far way ahead.
Thus, the key (though crucially, not the only key) to a great business that we can own for 20 years is one whose products can withstand the test of time and not run high risks of it ever being obsolete.
But before we rush out to buy any shares that we think fits the criteria of ‘non-obsolescence’, the financials of the company delivering the product are very important as well. Having a product that does not go obsolete does not necessarily mean a company’s in good shape. We have to look at its income statement, balance sheet, and cash flow statement.
Is the company making consistent profits? Are its per-share sales, profit and cash flow figures growing steadily over the years? Is the company heavily in debt (generally speaking, companies with little or minimal debt are subjected to lesser financial risks)? If there are significant amounts of debt, what are the available options a company has to deal with it when it comes due?
These are some of the questions we at the Fool often ask ourselves when we check up on a company.
Foolish Bottom Line
I’ve given a very basic skeletal framework we can use to think about stocks when trying to select a long-term investment. Do note that it is not the only approach that one can use. I hope it points you to one of the many right directions as you discover more about investing in your own quest to find great long term stocks. Let The Motley Fool Singapore continue to guide and teach you, for free, on this quest. Sign up here for The Motley Fool’s FREE weekly investing newsletter, Take Stock Singapore. Take Stock Singapore will show you how you can continue to find great stocks and GROW your wealth in the years ahead.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing owns Berkshire Hathaway’s B-class shares, and shares in Raffles Medical Group and Amazon.
This article was first published on Fool.sg in September 2013.