How to identify companies you can hold for the long-term (at least 10-20 years) in your portfolio?

Updated: Mar 19

Table of Contents


Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.


 

Benefits of holding long-term:

Ever wondered why Warren Buffett doesn’t sell his Coca-Cola shares for other “faster growing” or more “exciting” stocks even after so many years?


Have you ever wondered why super investor like Warren Buffett hangs on to his Coca-Cola stocks even though they are no longer “undervalued” (in the words of a value investor) or growing (in words of a growth investor)?


Many people wonder “why doesn’t he just sell his Coca-Cola and invest his earnings in other younger & faster growing companies?


The answer is simple, This is because of the enormous dividends yields he is acquiring from the stock.

Warren Buffett bought more than $1 billion worth of Coca-Cola stocks in 1988 (that is 20 years after they went listed).

Coca-Cola's dividend yields as of March 2021.
Coca-Cola's dividend yields as of March 2021.

Assuming he purchased Coca-Cola stocks at entry price of $2.39 at 1988,

Capital gains of 2,000+% aside in the past 30 years,

He is gaining up to 70% of returns per year purely based on Dividend earnings itself.

(Formulae):

(Price today x Div yield) / Entry price =

($51.44 x 3.27%)/ $2.39 = 70%

His Coca-Cola stock alone is generating about $700 million in dividends earnings every year for him.

And not forgetting the capital gains, Coca-cola stock also generated 10% of annualized returns for him from 1988 until today.


This is why Coca-Cola is Berkshire’s 3rd largest holding and also one of the best investments he has made.

 Warren Buffett on why he will never sell a share of Coke Stock
Warren Buffett: "I will never sell a share of Coke". [i]

Some important things to look out for when investing in companies that we can hold for the super long-term. (Good if its 10 years and above, better if its 20 years and above).


One thing to keep in mind before you start analyzing a company and deciding if you would like to add it into your portfolio or not.


If you think you can hold the company for at least 10 years, that’s good. If it is more than 20 years, that’s even better. If it is anything less than 10 years, then you should not consider buying the stock in the first place.

If you would like to reap gains like Buffett over the long run.

It is important for us to first engage in downside protection (meaning mitigating the risk factors involved), we do this by investing in companies that will not “Die” (meaning be bankrupt or be irrelevant and lose market share rapidly to their competitors in the industry) in the next 10 to 20 years- which will ultimately cause their share price to plunge and not recover.



[When engaging in downside protection, we ought to avoid companies that show these traits]:


1. Avoid companies with poor Balance sheet

Most importantly, we ought to avoid companies with high levels of debt.

For example, Netlfix albeit a fantastic company providing services which is arguably important in many consumers’ lives today.

Their high debt levels (Net Debt to Equity ratio of 96% and Debt to Equity ratio of 167%) today make them a rather risky company to hold for the long term.


General rule: I would avoid companies that have more than 100% of Net Debt to Equity.


You can check for their Debt to Equity ratio over here on Reuters website:

https://www.reuters.com/companies/NFLX.OQ/key-metrics

Look under ‘Key Metrics’ tab > ‘Financial Strength’ > ‘Long Term Debt/ Equity’




As for Net Debt to Equity ratio, the formula is = (Total Debt – Cash & Cash Equivalents) / Total Equity


Why is this a concern?

Since Netflix’s core service is to provide entertainment to their customers,

Their competitors do not only existing in the video streaming space but also any other forms of entertainment such as video games, social media etc.


If new forms entertainment arise in a rapid pace, or if their direct competitors come up with more attractive offerings or more innovative products which give customers better value for money, Netflix may not have a high level of flexibility to innovate fast enough- which requires a lot of cash to do so, due to their poor balance sheet position.

The recently launched Disney + which is selling their subscription at competitive rates may pose as a threat for Netflix’s business model.

And because Disney has a a lot more cash ($17 billion) as opposed to Netflix’s $8.2 billion, plus (no pun intended) it has a much stronger balance sheet (only 59% Debt to Equity Ratio). Disney + could be a major threat to Netflix when they decide to create more of its own contents on the platform offer their service at a cheaper price (engaging in price war) compared to Netflix.



2. Avoid companies which are slow to/ unwilling/ unable to innovate.

We also ought to avoid companies that have shown signs to be either unwilling or late to innovate (especially important in an industry where competition is high and constant R&D and product improvement is required when the market trend shifts).


Some examples of companies which failed to innovate in a timely manner in the past were Nokia and Kodak, who both used to hold close to monopoly positions in their respective industries and were eventually disrupted by new and smaller upstarts.


As for present companies like BMW, VW, Ford or Daimler (Merc) who are market leaders in their industry today.


It may be difficult to imagine there is a possibility that large automakers like them may lose their positions as market leader in the foreseeable future.


However, due to the shift in the industry towards trends of decarbonization, many countries like U.S, China, U.K and European countries are implementing policies to encourage the use of Electric Vehicles while discouraging the use of Internal combustion engine (ICE) models.


Currently for most of the automakers, the cost of producing EVs are very high, making this a low-margin segment for them. Since most of their revenues & profits are generated from selling ICE car models, coupled with their current high level of debts,

Net Debt to Equity ratio for some of the largest auto companies.
Net Debt to Equity ratio for some of the largest auto cos'.

It makes it difficult for them to invest heavily in EV R&D efforts since selling EV vehicles will cannibalize their own ICE car segments, reducing the overall profitability of their businesses.


Avoid companies who are unwilling to disrupt their own business models before others do, because these are the companies who will become complacent and this make it difficult for them to innovate and embrace change in time in the future.

 Look for businesses who disrupt themselves before someone else does.[
Look for businesses who disrupt themselves before someone else does.[ii]


3. Mitigate or avoid companies that have risks of being negatively affected by Antitrust policies.


Although it is rather obvious that companies like Google and Amazon will very unlikely “die” in the next 10-20 years.

The downside for these large tech companies is that they may be hit with antitrust lawsuits where government may attempt to break them up or force their parent company to sell their subsidiaries to promote fairer competition in the market place.

For example, Facebook may be facing more antitrust pressures and scrutiny under President Joe Biden’s administration.


However, if you have:

  • already bought into some of these stocks at an earlier period at a much cheaper entry point, and

  • you have very high conviction in their one-of-a-kind business model and their growth potential, plus

  • you are willing to take the risk of their stock price potentially plunging significantly in the future if they are really broken up.

You can still allocate a small portion of your portfolio for stocks like these, preferably not more than 5-8% of your portfolio.


But if you would like to add stocks like these into your portfolio, and you have yet to buy them. I would advise not allocating more than 5% of your portfolio for stocks like these.



4. Mitigate portfolio allocation for companies which have high level of Keyman/ Key person risks.


Keyman risks exist when the corporation’s success is heavily reliant on a one or a few key individuals of the company.


This risk usually exists for newer companies which are either:

  • not very established in the marketplace yet, or

  • have yet to obtain a significant market share of the industry they are operating in.

And their key executives: i.e., the Founders or CEO of the company are playing vital roles in spearheading key projects to see through the success of the company.



i. Past case study: Apple

This was quite obvious in the case of Apple, when Steve Jobs was fired in 1985 and the company was in the brink of bankruptcy under John Sculley’s leadership in the few years which followed.

When Steve Jobs returned as CEO, he launched a range of innovative products including the iMac, iTunes, iPod, iPhone and iPad as well as Apple Retail Stores. In 2011, Apple became the world’s most valuable public company.

It is clear that Apple’s massive success was highly attributed to how Jobs led the company.

It is without a doubt that Apple’s success up until today is heavily influenced by Job’s leadership.[iii]

ii. Past case study: Amazon

Similarly, it is safe to assume that Amazon would not have been as successful as they are today if Jeff Bezos stopped serving as their CEO during the crucial times in their early days when they were battling industry giants like Barnes and Nobles.

Amazon had to battle against giants like Barnes & Nobles when they first started in the book-selling space.
Amazon had to battle against giants like Barnes & Nobles when they first started in the book-selling space.

iii. Current case study: Tesla


An example of a bright company with a reasonable amount of keyman risk today is Tesla,

Elon Musk, CEO of Tesla Motors, shown above in Beijing.[iv]

Although Tesla has about 18% of the market share in the global EV sales as of Oct 2020 [v],

they only have about 0.8% if the total auto industry’s market share.


There are various sources attesting that Tesla’s EVs are indeed superior in terms of technical specifications and also when it comes to value for money for consumers at this point, but they still have a long way to go before they capture a significant amount of the total addressable market share.


And they need to continue to prove that they are able to stay ahead of the fierce and increasing amount of competition from large traditional car makers, which is no easy task.


Tesla’s global market share as of 2020 stood at 0.8%.
Tesla’s global market share as of 2020 stood at 0.8%. [vi]

Hence, I believe that if he leaves his role as the CEO of the company at this important time, it will negatively impact their company’s near and long-term trajectory.


Even if a few of their key important people leave the firm and join a potential competitor, taking away Tesla’s trade secret with them, this will have a adverse impact for the company too.

Peter Rawlinson, ex-chief engineer for Tesla’s Model S.
Peter Rawlinson, ex-chief engineer for Tesla’s Model S. [vii]

Similar to point 3 above, if you would still like to invest into companies like these (which possess a high level of Keyman risks),


I would advise that you keep them at no more than 10% of your total portfolio.

You can add more in the future however when their progress and ability in capturing the majority of the market share is becoming clearer.



5. Avoid companies which are heavily covered by short seller companies.


This is particularly relevant for companies where public information is not widely available and their released financial statements may not be as reliable.


Some examples in the past would include Luckin Coffee which reported fake numbers to entice investors’ interest.



Similarly Wirecard AG did the same by artificially inflating their profits,


(What you can do to avoid companies like these):


Do a quick search on google if the companies you are looking for is being covered by popular short seller companies like Muddy Waters, Blue Orca Capital, Bonitas Research and Iceberg Research.


You need not look into each of their website, just do a quick search on google in this format will do: “Company Name” + “Name of the shortseller companies” and see if any results come up.


If they are heavily covered, and you do not know much about and cannot find much reliable information about this company, it is best to just avoid them completely, there are still plenty of other companies out there you can look into.


Although short sellers may be disliked, the information they provide to the public may help prevent you from investing in potentially fraudulent companies which could lead to your capital loss.



[Traits to look for to identify companies that will be around for a long time]:


If the companies you are keen to invest in manage to pass through all the tests above,


you can now see if they display these traits below to increase your chances of ensuring they will continue to be around and perhaps thrive in the marketplace for long time to come.


So definitely:

1. On top of having a strong balance sheet:

  • meaning the company should have minimal or low amount of debt and

  • should have an increasing or healthy amount of Cash on hand too.

  • I.e. in the case of Adobe, you can see that their Cash & Equivalents amount is shown to be increasing

Adobe's increasing amount of Cash on Hand on a yearly basis.
Adobe's increasing amount of Cash on Hand on a yearly basis.
  • You can do this by searching for the company name + Reuters on google, And look under Financials > Balance Sheet



2. The company should show to have the ability to generate healthy and positive flows of Cashflow from Operation as well.


As a general rule, I would avoid companies which have negative operating cashflows.

And if their business model is very promising, I would keep them in my watchlist and only consider them seriously once their business turns around and show to have the ability to churn out positive operating cashflows consistently into the future.


This can also be easily checked through websites like Reuters:

Adobe's increasing amount of Operating Cash Flow on a yearly basis.
Adobe's increasing amount of Operating Cash Flow on a yearly basis.

Just search for the company name + Reuters on google, and look under Financials > Cash Flow tab.



Note: there are generally 2 type of industries which companies will operate in which investors will invest in:

They will be either:


i. Evergreen industries which has been around for a while:


Examples of such industries would be:

  • Food & Beverages,

  • Clothing,

  • Consumer Electronics,

  • Pharmaceuticals etc

You should expect that companies in evergreen industries to have a high level of competition from their peers because these industries have been around for a long time,

Hence, if you would like to invest in them, you should:



One thing you should look for when investing for companies operating in evergreen industries:


The ability for them to establish a strong Brand presence and have loyal customers.


A company with a strong branding power and fiercely loyal customers will make it very difficult for competitors to grab their market share.


Here are some of the examples of successful companies who have done very well in the past (and some even continuously to do well today as well):


Coca-Cola


Starbucks



Nike



Apple



Louis Vuitton Moët Hennessy


Disclaimer: this is not a suggestion invest into these companies at this point, these companies are merely for case studies looking into examples of successful companies who have strong branding power & loyal customers.



The second type of industries which companies operate in are:

ii. Newly emerging industries:


Then there are companies that operate in newly emerged industries,

some examples will be Software as a service “SAAS” companies who are operating in fields of E-commerce, Big Data and Cloud technology etc.


Usually for companies that are operating in this space, they will either be companies who:

  1. Are either already well established or

  2. are the new upstarts who are growing and gaining market share quickly in their industry from the larger competitors.


a. Companies who are already well established and have a large portion of the market share:

These are the companies who have already successfully captured the majority of the market share and the probability of them maintaining their positions as the market leader in their respective fields will remain high in the future.


Some examples of these companies would include Microsoft, Salesforce and Adobe,


One easy way to determine if these companies are able to continue to maintain their markets share is to evaluate if there are high switching costs for their consumers if they choose to switch to competitor’s goods & services.


Stock prices of companies like these tend to be less volatile compared to the next type of companies which play the role of upstarts.



b. Companies who play the role of Upstarts


These are usually companies which are more innovative and disruptive in nature, and are able to grab market share at a rapid pace from the existing “giants” who are unable to innovate and embrace change as fast as them:


A few examples would be:

what Amazon did to Walmart and Barnes & Noble in the past

Various companies and industries which Amazon disrupted
Various companies and industries which Amazon disrupted.[viii]

what Pinduoduo is doing to the other E-commerce giants in China like Alibaba & JD.com


what Airbnb is doing to the Hotel Industry


and what UBER did to the Taxi industry



However, regardless of which type of companies you would like to invest in, be it the more established ones or the ones which are playing the role of upstarts,


It is imperative that the company is showing traits to show that they are able to:



3. Prioritize and embrace continuous INNOVATION.


This is arguably one of the most important traits to look for in a company regardless of the industry they are operating in to determine if they are able to stand the test of time and still be relevant in their marketplace after a long time.

It is imperative that the culture of these companies is shown to prioritize and embrace continuous innovation,

even at the expense of cannibalizing into their own businesses in the short-run.


This can be detected through observing the vision and management style of the companies,

  • Do the leaders of the company appear to be resolute in ensuring constant innovation is a part of the company’s culture?

  • Are they not afraid of making mistakes & emphasize in investing into the future?

These are usually the companies who are not too focused on the short-term results in a trade-off for the long term ones.


Here are some examples of companies and their leaders who placed heavy emphasis on constant innovation:


Elon Musk & Tesla

Tesla & SpaceX’s employees are not punished for mistakes, they are however for lack of innovation.
Tesla & SpaceX’s employees are not punished for mistakes, they are however for lack of innovation.[ix]

- Elon Musk, arguable one of the best innovators of our time, and CEO of some of the most forward-looking companies like Tesla, Space X and Neuralink shared a very interesting quote on what are his thoughts on Warren Buffett’s focus on investing in companies with strong “Moats”:

If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation — that is the fundamental determinant of competitiveness.” Elon Musk

Elon Musk is clearly stating here that relying on traditional form of moats (Intangible assets like Brands, Switching costs, Network effects, Efficient Scale, and Cost Advantage) alone without taking into consideration the pace of innovation of these companies is a crummy way to identify investment opportunities.


(Side Note): Although Tesla is definitely one of the most innovative companies out there today, they also have very strong branding power and have developed a cult-like following from their customers – which is a form of Moat too, giving them an extra edge over other players in the industry.

Tesla and their “superfans”.[x]

Jeff Bezos & Amazon

Jeff Bezos on the importance of constant innovation and to “evolve”.[xi]

Jeff Bezos also arguably one of the most innovative CEOs ever, he was always known to think and plan years ahead and was not afraid of investing the companies’ earning to continuously venture into new segments i.e. they went from merely selling books from the beginning to almost everything (from Groceries, to shipping container houses) on the platform today.


He also ventured to other businesses segments which give the company a larger total addressable market with more room to grow like:

  • Hardware manufacturing- by manufacturing their own consumer electronics

  • Cloud computing - Amazon Web Services

  • Subscription services- offering streaming of movies, TV shows and more


Now that he has stepped down as the CEO, it appears that he may be focusing more on his space exploration company, Blue Origin.

This is a fantastic biography about Jeff Bezos and his founding of Amazon, which I highly recommend if you are looking for a great business book to read.


But safe to say that the Amazon organization will likely continue their operations in an innovative manner due to the culture which Jeff Bezos has built and also to continue to venture and expand into various fields like pharmaceuticals, small business lending, smart homes and more.


(Side note): Amazon in my opinion is a fantastic business to own as an investor, however investors who are interested to add them into their portfolio should be aware of potential antitrust policies which may be enacted upon them, and hence may want to limit their portfolio allocation for this company accordingly to limit the downside risk if the government really do implement policies which force Amazon to sell off some of their subsidiaries to prevent monopolistic behaviour and to promote healthier competition in the market place.



Steve Jobs & Apple

Steve Jobs on embracing change and viewing them as opportunities rather than as threats
Steve Jobs on embracing change and viewing them as opportunities rather than as threats.[xii]

The late Steve Jobs who place great importance in innovation has instilled a culture of deep innovation which is still existent in Apple today and continue to inspire many other companies today long after he has passed.



Reed Hastings & Netflix

Reed Hastings on the importance of moving fast.
Reed Hastings on the importance of moving fast. [xiii]

Reed Hastings from Netflix who took the bold risk of moving into the streaming business and disrupting his initial rent-by-mail business was arguably one of the most innovative decision he has made which has proven to pay off very well.


(Side Note): As mentioned above, although I am a fan of Netflix’s business model as a whole, I would be cautious in adding them into my portfolio due to their weak balance sheet. Their Net Debt to Equity level as of early March 2021 is standing at 93% and Debt to Equity level is at 167%.



(Bonus): Great if the company also has Branding power, especially when they are operating in newly emerged industries.


It is usually rare for companies to have strong branding power and loyal customers when they are operating in newly emerged industries (example SAAS companies.)


An example of a company that does though is Airbnb,


Where their huge group of hosts heavily endorse Airbnb’s service since it provides the opportunity to rent out extra rooms in their properties at lucrative rates for short term stays, providing the hosts extra income and reducing their monthly instalment or mortgage expenses.


The renters on Airbnb also share similar positive light for the platform as it gives them more lodging options, which may be more suited for their budget range and also the type of experience they would prefer instead of staying in the same cookie-cutter experience provided by larger hotel chains.


For more about how Airbnb founded their company and their corporate culture, you can read more about it in this great biography.


It is also generally a great sign if they have high number of social media following especially when compared with their peers.



(Side Note): Although I am a fan of the company’s business model and also their management team, and I believe there are a lot of growth potential for the company going forward into the future,

I am not looking to invest in them at this point of time because they are still cashflow negative and I would prefer to wait until the COVID situation becomes more under-control and borders around the world are opening up to allow for travelling again.



Lastly, regardless of which Industry the company is operating in, it will be a great bonus if:


4. The company has growing Revenue from various geographical segments.


If you are looking for higher growth companies which can bring about 15-20% annualized return consistently for many years to come, you would have much better chance investing in companies that are able to grow their presence and revenue globally, compared to those who are focusing on a single market only.

Always favor companies who have globalization plans instead of merely localization plans only.
Always favor companies who have globalization plans instead of merely localization plans only.

Plus, it is also a great downside minimizer for investors if the company is able to obtain revenue from various parts of the world rather than relying on a single market only.


Case Study: Adobe

A great example would be Adobe:


Where about 52% of their revenue comes from United States, the other 48% comes from other regions around the world like United Kingdom, EMEA, Japan and other APAC regions.


And you can see that all of the regions they are serving have experienced consistent revenue growth on a yearly basis, this is a very good sign.


So, in the unfortunate event that if United States faces a reduction in demand for Adobe’s goods and services, at least they would still have revenue streams coming in from different parts of the world to support their growth.



Case Study: Vicom, company which serve the local market only.


Companies like Vicom (the monopoly company that provides car testing and inspection services in Singapore), will usually do very well at the early stage when they are able to capture market share rapidly in their local market.


But once they have capture most of the market share in their local markets and have shown little intention or inability to expand their business beyond their borders, then there will usually be a growth ceiling for them.


Vicom provided an annualized return of 10% since their IPO price until April 2021.
Vicom provided an annualized return of 10% since their IPO price until April 2021. [xiv]

However if you have invested into them consistently every year since Oct 2000 (which is 5 years after they went listed) on a yearly basis, your average open price will be around $0.86.

And although their dividend yield is 4.4% today

Vicom's dividend yield as of early April 2021.
Vicom's dividend yield as of early April 2021.

With the lower entry price of $0.86, you will get around 11% every year from the dividend yields alone, which is pretty decent returns since it is excluding the capital gains.

This again just comes to show the benefits of investing early and holding for the long-term.

Closing

This marks the end of this article, I hope these brief guidelines give you some insights to identify some companies to hold for the long term for your portfolio.


On the next article, I will talk about a company which has given their investors phenomenal returns even though they are not paying a single cent of dividends (in oppose to what Coca-Cola is doing now) till today even after 24 years of listing their company in the market.


Along with some common mistakes to avoid as an investor.


 

Endnotes: [i] Warren Buffett on why he'll never sell a share of Coke stock. (n.d.). Retrieved April 04, 2021, from https://www.coca-colajourney.co.nz/stories/i-like-to-bet-on-sure-things-warren-buffett-on-why-hell-never-sell-a-share-of-coke-stock [ii] Mindy Grossman Quotes. (n.d.). Retrieved April 04, 2021, from https://www.brainyquote.com/quotes/mindy_grossman_863932 [iii] Kedia, S. (2019, February 03). This is Why Steve Jobs was fired from Apple & how he came back to make it the best smartphone company. Retrieved April 04, 2021, from https://www.marketingmind.in/steve-jobs-fired-apple-came-back-make-best-smartphone-company/ [iv] Ramsey, M. (2014, September 03). Tesla to Choose Nevada for battery factory. Retrieved April 04, 2021, from https://www.wsj.com/articles/tesla-to-choose-nevada-for-battery-factory-1409773118 [v] Desk, H. (2020, October 31). Tesla has 18% market share in global EV sales. BUT rivals are hoping to catch up. Retrieved April 04, 2021, from https://auto.hindustantimes.com/auto/news/tesla-has-18-market-share-in-global-ev-sales-but-rivals-are-hoping-to-catch-up-41604112212185.html [vi] Gorenham, J. (n.d.). Here's what Tesla's current market SHARE looks Like globally, in the us, In China, and In Europe. Retrieved April 04, 2021, from https://www.torquenews.com/1083/here-s-what-tesla-s-current-market-share-looks-globally-us-china-and-europe#:~:text=Tesla's%20Global%20Market%20Share%20Charts%20and%20Data&text=In%202020%2C%20a%20flat%20year,produced%20on%20Earth%20las