While I was barbecuing chicken for dinner last night, I was reading my Twitter feed. I came across a post where a few financial advisors were responding to a question….what one stock would you recommend to buy and hold for the next 25 years?
To clarify, we do not recommend owning only one stock and would not consider this to be an investment strategy. We are firm believers in holding a globally diversified portfolio of many stocks across all industries, sectors and geographic regions.
But for this hypothetical question, I thought it would be interesting to consider.
I first thought about what stocks I would NOT recommend and why. The key concept that kept surfacing was innovation and change and what industries or companies would be most affected by significant change over the next 25 year period. And what kept occurring to me was that nearly every company or industry I thought of, change could or would be a huge factor.
Looking at industry categories, I ruled out energy companies, as traditional oil companies obviously face threats from alternative energies. The retail and consumer sectors are under huge pressure from Amazon and online competition, so while there will be successes, I cannot predict which ones they will be.
Healthcare providers will make money, but insurance and reimbursement pressures will limit or impact their futures. Some drug companies have been hugely profitable and successful over the long term, but they must constantly innovate, spend millions or billions to come up with their “next” huge drug and again, there is no way to predict which company will be able to develop the drugs of the future.
Industrials, manufacturers and utilities will also have winners and losers, but none of these areas had a company that excited me for the next 25 years, with the possible exception of Boeing.
Technology and related areas was an obvious choice to consider. The key issue was whether the successes of today will be the leaders over the next two plus decades. AOL and Yahoo were stock market darlings in the late 1990s, then both flamed out. Just because a company has been successful recently does not mean it will do great over the next 25 years. This is called the recency effect.
I did not consider very small companies or companies like bio-techs for this pick. To do that would be more like buying a lottery ticket or a crapshoot selection….it may either do incredibly well or bust completely. I viewed this as finding a company today whose stock will be very successful over the next 25 years.
Amazon is dominant in two major areas, at least, Amazon Web Services (AWS) and their retail sales business. My concern with Amazon is that since AWS is so profitable, the natural tendency in business is that very profitable areas lead other companies to enter that sector, which eventually drives down profitability. That is occurring now, as AWS is increasingly being challenged by Microsoft, Google, IBM and many others, both in the US and globally.
Apple is a strong contender. Today, they seem unstoppable in selling iPhones and this product has changed how we live, communicate and shop. In reality though, they only have 12% of the worldwide smartphone market share. Their customers are highly loyal and Apple will continue to generate revenue from customers through app purchases and other sources in the future. However, as with all technology, will they be replaced in the future? Will they be able to continue to innovate and develop new products and revenue sources? The biggest threat is that the product life cycle can be short. Will they continue to succeed or become a future Nokia, Motorola or Blackberry?
My other choices are financially related. JPMorgan Chase is the dominant US bank and a leader in credit cards. As more and more spending is done with credit cards, they will capture more of these fees every day. However, banks run into problems when the economy has a downturn, which inevitably will occur over 25 years. They have broadly diversified sources of revenue, from everyday consumers, wealthy individuals and corporations throughout the world.
Likewise, Visa is the worldwide leader in credit cards, with a 56% market share. It will be difficult for another company to replace them, but technological change could lead to other ways we pay for goods and services, which could reduce Visa’s business, as well as potentially force their fees down over time.
My last consideration is Berkshire Hathaway, but not because of Warren Buffett. He is near the end of his work life, unfortunately. He will leave a legacy of a strongly diversified company with businesses in insurance, utilities, railroads, industrials and many other companies and products, along with billions of holdings in other stocks. Berkshire will likely do well, but as it is already large and getting even larger, it may have a harder time outpacing the broad market, due to the law of large numbers. Also, it generates most of its revenue in the US, so is not as globally diversified.
So what is my choice and what are the lessons from this exercise?
It’s not a glamorous choice, but I would hold JPMorgan Chase for the next 25 years. Chase is already quite large and successful, and does not face some of the other technological challenges that the others do. As we can’t predict the future, my thinking is that banking, lending, credit cards and related services will continue to be needed. If they are able to innovate and deal with change, Chase can continue to be quite profitable.
It is quite likely that one of the other companies mentioned here will outperform it, but each of the others seem to face greater potential risks, at least conceptually, than Chase does. I would not be surprised if Apple and Amazon stock’s outperform Chase, as they have much greater opportunities.
Thinking through this question has only made me more comfortable with our investment philosophy of not trying to pick individual stocks, but rather hold a globally diversified portfolio of stocks.
If we tried to pick individual stocks for you for your future, essentially this is the exercise that we would have to do for every stock choice. And it’s impossible!!
This lesson was quite vividly reinforced as I finished this essay Thursday morning, as Facebook lost about 18% of their stock value today, due to concerns about their future profitability and user growth. This again is why we are broadly diversified and don’t just recommend holding 20-30 stocks.
From a pure performance standpoint, the only thing I’m pretty sure of is that the best performing stock of the next 25 years may not even be a public company today…..or may not even exist. However, we would eventually own some of it in your portfolio in the future, within our diversified holdings.
If you have thoughts on this post and your hypothetical pick, please email me at firstname.lastname@example.org. We will see what happens in the future.