The Shocking Advice Warren Buffett Gives about “Forever Stocks”
We talk a lot about “Forever Stocks” here at StreetAuthority. In fact, we practically pound the table talking about why we think they’re one of the single best ways we know of to make serious long-term gains in the market. If you’re not familiar with Forever Stocks, to put it simply, they’re companies with strong business models that you can buy, hold, and basically forget about. You can sleep easily at night owning Forever Stocks.
But there’s a reason we talk about Forever Stocks so much. It’s because it’s not just us who think this is the best way to invest. Some of the wealthiest people on Wall Street agree. In fact, that’s how many of them made a fortune.
Take Warren Buffett for example. He’s famously said, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for 10 years.”
This is how Buffett made a fortune off of stocks like Johnson & Johnson (NYSE: JNJ), Kraft (NYSE: K) and Wells Fargo (NYSE: WFC) — he bought them and held them for the long haul.
Now, it’s easy to dismiss this example as something only the rich are able to pull off. After all, you’re going to need that money some day, right? That would be a mistake. To truly understand the power of what Forever Stocks can do for you, listen to the first couple minutes of what Buffett has to say about one of the greatest investments he ever made.
Now, Buffett wasn’t able to buy shares of The Coca-Cola Company (NYSE: KO) in 1919, of course. He wasn’t even alive then.
But he did the next best thing: He bought whenever he saw the long-term value of the business model.
The billionaire “Oracle of Omaha” began buying stock in Coca-Cola in 1988. He continued accumulating shares, winding up with about 100,000 shares in 1995, worth about $1.2 billion. And though the stock is still in the same range as it was in 1988 (about $36) — that’s after three stock splits. All told, it would turn out to be one of the best investments his company, Berkshire Hathaway (NYSE: BRK-B), ever made — and one he still owns today (with a stake of 400 million shares, worth about $15 billion).
This brings to mind another Buffett quote: “Someone’s sitting in the shade today because someone planted a tree a long time ago.”
You see, Buffett didn’t wait to see how Coca-Cola would deal with competition from Pepsi. He didn’t wait for it to have an objective value metric like a low price-to-earnings ratio to tell him when to buy. He just saw that a) Coke was arguably the most well-known brand in the world, b) it is a well-run company and c) people will always like to drink sodas.
And that’s the key lesson about Forever Stocks.
Put simply, these are the stocks you can buy today and hold for the rest of your life. When you own them, you no longer need to worry about things like the “Fiscal Cliff,” inflation, the eurozone or flash-crashes.
This is exactly the reason many Buffett and many others have owned shares of these stocks for decades. They’re relatively painless to own, and you let the business do all the hard work for you, crushing the market in the process. As Paul Tracy, StreetAuthority’s co-Founder and Chief Investment Strategist behind our Top 10 Stocks newsletter says: “You don’t have to trade every day… or every week… or even every year to beat the market. In fact, your success actually increases the fewer trades you make and the longer you hold.”
Action to Take –> I’m not telling you all this to tell you to go buy Coca-Cola or Johnson & Johnson now. Sure, they’ve posted impressive track records, but I’m not sure they’re the best Forever Stocks you’d want to own now. All I’m saying is we think the simplest way to have any kind of long-term success in investing is to find a stock you want to hold forever, invest in it, and then forget about it.
[P.S. — As I said before, you probably don’t want to own Coca-Cola today if you’re looking for a Forever Stock. Instead, what you want to own is the “next Forever Stock.” The best resource I know of for finding this is with Top Ten Stocks. For more on what we think makes a good Forever Stock, and how to gain access to our latest recommendations, go here.