Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The idea of selecting a company to invest in forever may sound quite old fashioned in our times of ultra high speed decision making. But once investors become familiarized with the career of many outstanding long term investors, the strategy starts making much more sense.
After all, it was Warren Buffett himself who said: “Our favorite holding period is forever” and he has done extraordinarily well over the decades, becoming one of the wealthiest men on earth by following a few simple but very important investment concepts. Buffet invests in companies which offer what he calls “a moat”: a competitive advantage which holds competitors at bay and increases profit margins and return on capital for the company´s shareholders.
If a company is going to protect shareholders from competition through the decades while at the same time producing high returns on their investment capital, it needs to have some very special qualities. We need to focus on high quality businesses with dominant market positions and irreplaceable brands in order to be sure about their long term prospects. Once we have selected those companies, the strategy only requires some patience and discipline in order to be successful in the long term.
Investors should regularly commit new funds to these high quality stocks over time, and avoid all the surrounding noise as much as possible. If the investor understands the business and is convinced about the company´s competitive advantages, paying much attention to the march of the global economy or daily rumors about the stock will not be necessary or even productive at all.
One of the most beautiful aspects of these kinds of strategies is that the investor gets the added benefits of sleeping smoothly at night without having to worry much about the company going bankrupt due to a deep recession or losing its leadership position to competitors anytime soon. If you know what you are buying, and are convinced about the strategy, making the decision to pull the trigger when the stock is cheaper due to investor´s pessimism is a much easier and straightforward decision.
Think about Coca-Cola (NYSE: KO) for example. The world leader in soft drinks has an irreplaceable and globally recognized brand, actually it´s the most valuable brand in the world according to Interbrand. There is simply no way any competitor could build a brand strong enough to challenge Coke in the short term, it takes decades of investment in marketing and brand management to achieve such a position. Coke has a privileged presence in consumer´s minds and hearts, which is quite an extraordinary asset.
Coca-Cola is perhaps one of the clearest examples of a company with an irreplaceable brand power which guarantees shareholders returns in the long term. Warren Buffett started buying shares in Coca-Cola in 1988 and Coke has always been considered a prime example of Buffett’s Philosophy. Buffett has explained his logic for holding the stock in Berkshire Hathaway´s (NYSE: BRK-A) (NYSE: BRK-B) portfolio quite compellingly: If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done."
Coke has displaced PepsiCo (NYSE: PEP) from the second position in market share in 2010, the two most consumed soft drinks in the US are Coke and Diet Coke, with Pepsi coming in third place. High profile news, like Dunkin’ Brands (NASDAQ: DNKN) deciding to leave Pepsi and choosing Coke instead have generated some jitters among PepsiCo shareholders, and the company will likely step up its efforts to regain some ground against Coca-Cola in the middle term. Although PepsiCo is a formidable competitor, history has shown that there is enough room for both companies in the global drinks market.
Coca Cola still has many growth opportunities which the company will try to capitalize on in the following years. Emerging markets should continue performing well, as products like carbonated drinks tend to increase in popularity when low income families see better economic conditions. Other products like bottled water and Powerade sports drinks will continue benefiting from the trend towards a healthier lifestyle in both developed and emerging markets.
Coke pays a 2.8% dividend yield and those dividends have been increased in 49 consecutive years, so considering the company´s strong product positioning, its solid balance sheet and cash flow generation over the long term, investors could reasonably expect higher dividend payments in the future.
There are not many companies in the world which can be bought with the idea of holding forever. Coca-Cola is part of that select group since it has an invaluable brand name and a very strong leadership position. The company has successfully sailed through various economic scenarios in the past, and is well prepared to continue providing above average returns for its shareholders in the following decades.
Motley Fool newsletter services recommend Berkshire Hathaway, PepsiCo, and The Coca-Cola Company. The Motley Fool owns shares of Berkshire Hathaway, The Coca-Cola Company, and PepsiCo. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.