If, in 1999 and 2000, when Colgate-Palmolive, Hershey, and Brown-Forman were each trading for 30x profits, you decided to buy shares anyway, the results would look like this:
The Colgate shares would have compounded at 8.15% annually, turning a $10,000 investment into $30,200.
Shares of Hershey, despite even higher valuation compared to Colgate, would have compounded at 11.50% annually over that time frame, turning a $10,000 investment into $46,500.
Shares of Brown-Forman, the excellent alcohol company that almost no one outside of Louisville or the investor community has ever heard of, has compounded at 15.60% annually since that time, turning $10,000 into over $77,500.
In 2010, Coca-Cola made the decision to buy its North American bottling operations for $12.2 billion. Before that point, when you owned shares of the famous KO stock, you were really owning the maker of the syrup inside that can, cup, or bottle, as the bottlers were run by different families, and in some cases, publicly traded corporations. The reason why Coca-Cola did not own its bottlers previously is because it’s much easier to take over the globe through a model that mimics franchising rather than doing it yourself: it was a lot easier for Ray Kroc to hire wealthy individuals to put up a McDonald’s and then demand a share of their profits rather than coming up with a few hundred thousand dollars up front every time you want to roll out a new fast-food location yourself.
When I was a sophomore in college during the financial crisis, I was an assistant (TA by another name) for a senior that was best friends with a professor. The senior I was working for was an accounting major, and she would frequently discuss individual stocks and general portfolio management with the professor in question.
One day, in 2009, the professor said, “I just lost a million dollars officially. I can’t do this anymore.” She sold all her individual stocks, mutual fund holdings, and went to cash. I didn’t say anything because (1) I wasn’t part of the conversation, (2) I was an English major, and believe it or not, millionaires don’t want financial advice from teenagers that sit in the atrium reading Charles Dickens, and (3) my real-life personality is such that I don’t talk finances unless I’m invited to do so because I don’t take unsolicited advice seriously and it’s not my position to impose on others (especially those in what society would recognize as being in a superior position).
Coca-Cola. PepsiCo. Chevron. Exxon. Colgate-Palmolive. Procter & Gamble. Johnson & Johnson. Those are the companies that I have in mind as signature “this is my largest investment which I will rely on for retirement income” companies that ought to be a hallmark of blue-chip portfolios build to last throughout whatever economic environment presents itself in the coming decades. There is another company that deserves consideration on that list: Nestle.
It is widely underrepresented in the financial literature on long-term investing for a couple of reasons: it is a foreign business, and the reported profits and dividends don’t quite have the smoothness that you get from, say, checking out a profit and dividend history of The Coca-Cola Company. But still, the trajectory for Nestle owners is pretty darn upward over time. The payment is annual, with the company typically declaring a dividend in April and then paying it out to shareholders in May.
Every now and then, when I am looking to procrastinate before I get down to write an article, I check through the search engine traffic to see what is bringing new people to the site. Pretty consistently over the past several months, many of you have stumbled onto here by looking for ways to buy shares of Exxon through Computershare.
Although googling something and actually doing it are two separate things (imagine a chart comparing people who googled “how to lose 20 pounds” compared to those that actually do it), I am glad to see that topic be on the minds of people because regular investing with Exxon Mobil is probably one of the surest paths to long-term wealth for someone who is committed to spending decades increasing their ownership in a particular position.
Jeremy Siegel’s advice that buying large energy companies when they are out of favor, and holding through thick and thin, seems to have been going through an animadversion of sorts lately. I’ve been reading online about several oil investors that have said they are abandoning their oil stock investments after seeing the sharp declines in price since this summer. It seems they’ve taken Siegel’s advice to be—if the price declines 10%, buy more. If the price declines 20%, buy more. But any more than that, sell!
All of my articles, summed up into one:
#1. If you want to own companies that you can hold for three decades without thinking about hardly at all, then you have to avoid banks and the tech sectors entirely. Things like Wells Fargo and IBM will probably do very well over that time frame, but they require the steady guidance of montoring—the amount of debt a bad management team could put on a bank’s balance sheet quietly or the quickness of technological change over a short period of time make these stocks ineligible for permanent capital categories. If you want to think about “forever” investing, you need to focus on food, beverages, and the diversified energy and healthcare companies.
Hi Tim. I have seen Warren Buffett mention that the threat of nuclear weapons is what scares him the most about the future of America. I understand that this is a personal question, but I hoped you would share what you consider the greatest threat to the American economy, and how to prepare for it if possible. Okay thanks… -John
Interesting question, John. I like it because not only do you want to know what I consider to be the biggest problem, but what I consider to be the solution as well. I like receiving questions where I can already tell that the person asking the question has a fighting spirit.
When you build an ownership collection of the best companies in earth—I have in mind firms like Visa, Coca-Cola, Johnson & Johnson, and Chevron—there is a pleasant occurrence you can come to expect: These companies will regularly grow their profits, causing your calculations of the firm to constantly be subject to upward revision.
It came to my attention when I was in dialogue with a reader that had an average cost basis in Chevron stock somewhere around $63 or $64 per share, and couldn’t bring himself to pay $115 per share even though he thought the stock seemed like a good deal at the price. That’s a behavioral force worth examining—previous experience with a stock at a cheaper price can color your current perception of the company’s value now. It can have the effect of preventing you from making a good investment (into a company you already own) and lower your overall returns if you choose an otherwise inferior investment instead simply because it is something new and you don’t have previous mental baggage with that company.