This post is aimed at investors interested in making a permanent investment - the acquisition of companies that will likely be profitable for the rest of your investing lifetime and stand a good chance of maintaining profits if and when you pass those companies along to your beneficiaries or charities of choice. Oftentimes, a criticism of "forever investing" will say something similar to what Peter Sander wrote in his book "The 100 Best Stocks You Can Buy 2012":
"Now, does 'future' mean 'forever'? No, not hardly, not anymore. Nothing is really forever these days-as those who invested in General Motors (GM) or Eastman Kodak or AIG (AIG) or Bank of America (BAC) can attest. So while the 100 Best Stocks list correlates well with the notion of 'blue-chip stocks', the discussion proceeds with the harsh reality that 'blue-chip' no longer means 'forever.'"
The problem with this line of thinking is that not all blue-chip stocks are built to be the kind of companies you can tuck for 25+ years without relatively active monitoring.
In particular, Sander uses examples from industries that do not lend themselves to long-term investing without substantial monitoring.
Take Sander's financial examples, AIG and Bank of America. You would have to be crazy to think that you could simply buy a bank, take a Rip Van Winkle nap for 25 years, and expect all to be well two and a half decades later. There is simply too much debt relative to equity involved. The kind of leverage inherent in all financial investments means that you always need conservative management present to offset the temptation to add leverage during good times to goose returns.
Right now, Richard Davis and his managers at US Bancorp (USB) probably have the best track record for conservative banking practices. Yet, I would never recommend that someone own US Bancorp blindly for the next 25+ years because the success of a financial industry investment is closely tied to the particular managers running the show. If I wanted to put a dent in Berkshire Hathaway (BRK.B), the first thing I would do is remove Ajit Jain from the reinsurance division and replace him with someone who is willing to take reckless risks at low premiums.
Not all companies can be destroyed by replacing good managers with incompetent ones. You don't need a genius to run Compass Minerals (CMP). You simply sell salt and fertilizer. If you were the management there, you would have to try to fail in order to make the company go bankrupt. The success of financial institutions, meanwhile, often hinges on the types of leverage that an institution chooses to take on. That's why you can't put them into the "buy and forget it" category.
Now let us move on to Eastman Kodak. Despite being the poster child for "blue-chip investing gone wrong," Eastman Kodak has actually not been a bad investment for long-term shareholders. Why? Because long-term shareholders received the spinoff of Eastman Chemical (EMN) in 1994. If you bought before this spinoff, you would actually have achieved 7% annual returns from a 1990 initial investment in Kodak.
And if you bought Kodak immediately after the Eastman Chemical spinoff, you would have broken even on an inflation-adjusted basis if: (A) you pooled your Kodak dividends together from 1994-2008, and (B) sold when Kodak eliminated its dividend in 2008. While no one aims to make an investment that merely breaks even after 14-15 years, this is not a bad consolation prize considering you invested in a company that went bankrupt.
And lastly, there is General Motors. Just because GM is a household name and had achieved "blue-chip status," this does not mean that the company possessed a business model that lent itself to "buy and forget it" investing. GM has to come out with new types of cars every year! That is not a company that can run on autopilot. You need constant innovation in the car industry to remain relevant. Hence, the need for active monitoring.
If you're the type of person that aims to hold the same stocks for 30-40 years, then you want to focus on business models that need very little innovation to stay relevant. I'll give a few examples of business models that are suitable for "forever investing":
Take Hershey (HSY), for instance. The company sells chocolate bars. The underlying product is remarkably similar to what Milton Hershey sold a century ago. There's only so much innovation in the chocolate industry. The company has achieved 16% return on assets in almost all investing climates over the past twenty years (and it could be longer, but I was limited by the data at my disposal). If you want to put yourself in a position to own the same stock for 20+ years, this is the kind of company you want to own. Building a base of similar consumer staples that share "Hershey-like" characteristics would be my first stop on the search for "forever investing."
The next place I would check out is water utilities. York Water (YORW) has been paying dividends since 1816. Seriously, the company's dividend history is almost as old as our country. It paid dividends during the American Civil War, for heaven's sake. And World War I. And World War II. And so on. How could you not get excited about a business with that kind of stability? It helps that York Water sells a product that people would literally die without. Personally, I cannot wait for the price to be right for me to establish a permanent position in Aqua America (WTR).
After that, I would look to diversified conglomerates with limited exposure to financials. You'd want something like United Technologies (UTX), which generates profits from selling heating and air conditioning devices, selling and servicing escalators and elevating, selling and servicing military aircraft, among other niche activities. When you have your hand in every cookie jar, you often get long-term earnings stability as a result. If General Electric (GE) ever spins off GE Capital, the company's diversified business model will come about as close to "buy and forget it" as you can find.
Now, for the caveats:
Bad management can sink any ship. Period. This is why I would encourage every investor to actively monitor their holdings. However, some companies have business models that can take a lot of abuse (i.e. despite a seemingly endless string of product recalls, Johnson & Johnson (JNJ) continues to increase its cash flow per share every year) and still do fine for shareholders. These are the kinds of companies that are built for "buy-and-hold."
The big question you need to ask yourself is: How much innovation is necessary to keep this company's products intact? Colgate-Palmolive (CL) sells toothpaste and dish soap. You don't have to innovate your product much to stay in business there. Contrast that with something like Apple (AAPL). The technology giant needs to come out with a new phone every year or else the pitchforks start flying. Could you imagine if Apple simply said, "We're going to keep selling the same products for the next 10 years. Don't expect anything new." The company would plunge, because constant innovation is part of its long-term narrative.
That is the exact opposite of something like Coca-Cola (KO). In fact, Coca-Cola tried to innovate its product in the 1980s, and customers rioted! Seriously, it would take changing the product for someone to ruin Coke. That's how you know you've found a business model built for permanent investing. If you have the objective to own a company for the rest of your lifetime, look at consumer staples. Look at water utilities. Look at diversified conglomerates. Reliable businesses are still out there.