I own dozens of stocks and diversification is important to me. I like the idea of letting winners run their course and letting losers become a smaller part of my portfolio.
But what if I could only buy and hold one share? My first inclination would be to go with a holding company like this Berkshire Hathaway because it has invested in many other listed companies. However, if I had to rule out such “ETF-like” stocks, the decision would be more difficult.
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I evaluate several factors before buying a stock. The things I consider are probably the same as most other investors: valuation, management, track record, etc. However, two criteria stand out above all others.
First, I want the companies I invest in to have a strong moat. In the Middle Ages, heavily fortified castles had a moat full of water around them to help protect them from invaders. Business moats serve a similar purpose: protection from competition.
Canals come in different shapes. Some of these I particularly like are network effects (where a company’s value increases as it gains additional users/customers) and cost benefits.
Second, I try to buy stocks with multiple paths to growth, aka optional. This is important because a company with only one growth opportunity can sometimes hit a roadblock. Companies with optionality can easily enter new arenas to drive growth.
Several stocks have strong moats and options. My favorite right now though Amazon(NASDAQ: AMZN).
I use Amazon products and services almost every day. I am an avid reader and use the company’s Kindle e-reader and subscribe to Kindle Unlimited, which gives me access to millions of books. My family regularly orders products through Amazon Prime and watches TV shows and movies on Prime Video. We have Echo devices that integrate Amazon’s artificial intelligence (AI) assistant, Alexa.
Anyone, like me, who subscribes to Amazon Prime or Kindle Unlimited makes Amazon more attractive to advertisers and publishers. That makes Amazon more valuable – and that’s the network effect in action. One of the main reasons my family uses Amazon so often for shopping is its low cost — an example of the company’s cost advantage.
I like that Amazon continues to relentlessly strive to reduce its costs even further. The company’s focus on regional product fulfillment close to end customers is paying off. This also applies to innovation in automation, including the use of robots in fulfillment centers.
Amazon could be the poster child for optional options. After all, the company started as an online bookseller and then grew into a full-fledged e-commerce marketplace. The company then opened up its data infrastructure to external customers with Amazon Web Services (AWS). Today, AWS is the largest cloud service provider in the world. I expect AWS to continue to see tremendous growth in the coming years as organizations move their apps and data to the cloud to harness the power of AI.
Jeff Bezos, founder and executive chairman of Amazon’s board of directors, once said, “Your margin is my opportunity.” His words still ring true today as Amazon has entered the pharmacy and medical clinic sector.
Is there anything about Amazon I don’t like? Certainly. I would prefer if its rating wasn’t so high. However, history has shown that earnings-based valuation metrics don’t mean as much at Amazon as they do at other stocks.
Which brings me to what I consider to be the key word in my case for Amazon as the one stock I would want to buy and hold. The most important word is ‘hold’. Anyone who has held on to Amazon long enough has been a big winner.
I don’t know if the stock will deliver huge gains over the next twelve months. However, I am confident that if I hold Amazon for the next ten years, I will earn solid returns. The company’s strong position and many growth paths should ensure that it remains a winner.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon and Berkshire Hathaway. The Motley Fool holds and recommends positions in Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
If I could only buy and hold one stock, this would be it, originally published by The Motley Fool
