As a dedicated student of Benjamin Graham and David Dodd, as well as an avid follower of Warren Buffett (Trades, Portfolio), I would consider myself to be a long-term investor.
However, something that I have noticed over the past few years is the fact that long-term investing is becoming more difficult. These are just some thoughts on the idea of long-term investing and the way it interacts with the rest of the financial world.
The landscape is changing
When I say long-term investing, I mean buy-and-hold investing, which is based on Warren Buffett (Trades, Portfolio)'s advice that in your investing career, you should have a 20-hole punch card and look for just 20 good investments for your portfolio to rely on for life.
Long-term investing has become harder, in my view, because the lifespan of companies is getting shorter and shorter. Technological disruption over the past 20 years has been unprecedented, and companies that have not kept up have quickly fallen behind.
Today it is easier than it has been at any other time in history to set up a business, particularly in the creative space. It is also straightforward to raise capital. The internet has turbocharged the fundraising process. It is made the world much smaller, connecting investors all over the world with companies and, at the same time, you have various initiatives such as crowdfunding connecting millions of lenders with borrowers.
Some companies are coping well with this environment. Take Coca-Cola (KO, Financial), for example. This business has invested heavily in developing its customer offering for the 21st century and has spent billions buying up startups that have carved out a unique niche for themselves. Unilever (UN, Financial) is another excellent example. This European-based company knows what it takes to remain relevant and has been restructuring its business over the past 10 years, away from low margin commodity products towards more unique offerings both organically and inorganically.
These companies will likely continue on their current journey without much disruption. Their size means that they have plenty of firepower to buy up smaller competitors before they start to become a serious threat.
But not all businesses of similar size have the same advantage.Take Anheuser-Busch InBev (ABI, Financial) or Kraft Heinz (KHC, Financial), for example. Both of these consumer goods giants are struggling to adapt to the changes in their industries. Both have borrowed heavily to fund large acquisitions and are relying on cost-cutting efforts to improve margins and free up enough cash to pay down debt (it is also notable that both companies are linked to the Brazilian private equity business 3G capital).
Without enough free cash to reinvest and grow, both Anheuser-Busch (ABI, Financial) and Kraft Heinz (KHC, Financial) are struggling to increase sales.
I know how difficult it is to predict future winners in the stock market, so I don't want to say that either of these businesses will be able to turn it around or fail at some point in the next few decades. I do think they are great examples of how the business environment has changed and why it has now become harder than ever to pick long-term winners.
Not impossible
Nevertheless, while I do believe that picking long-term winners is harder than ever today, I also believe that it is not impossible.
Sticking with the tried-and-tested method of investing in well-known consumer good brands with strong balance sheets and robust cash flows is a strategy that should continue to bring results for the foreseeable future.
But investors need to remain vigilant. Keeping up to date with the companies you own has always been a critical part of the investment process, and with the investment landscape changing every day, this is now more important than ever.
Disclosure: The author owns shares in Unilever and Anheuser-Busch.
