When reading a letter from Bill Ackman to the board of Howard Hughes Holdings, I came across a thought-provoking comment: Ackman referred to Howard Hughes as a “forever company.” It made me wonder—what exactly qualifies a company as suitable for long-term ownership? What factors would make you feel confident in holding an investment indefinitely?
Here are four qualities I believe are critical in identifying a strong “forever investment.”
1. A Business You Understand Thoroughly
The first and most essential factor is understanding the business inside and out. Can you clearly articulate how the company generates its revenue? Do you comprehend the competitive forces at play in its industry? And, importantly, do you know what indicators to watch to assess the company’s future prospects?
This matters because long-term investments will inevitably experience periods of both exceptional growth and significant downturns. In these times, your knowledge of the company will guide your decision-making, often helping you navigate through temporary market fluctuations. For example, Exor, the investment firm tied to the Agnelli family (founders of Fiat), maintains substantial stakes in companies like Ferrari, CNH Industrial, and Stellantis. Their deep understanding of the automotive industry makes this concentrated investment approach sensible, despite the cyclical nature of some of these businesses.
2. A Market with Enduring Demand
While pinpointing specific future products can be challenging, focusing on industries driven by persistent consumer needs offers a clearer path. Healthcare is an excellent example. Although we cannot predict the exact medical technologies of 2065, it’s safe to assume that the demand for healthcare services will remain strong. People will always seek to understand their health problems and find ways to get better.
This broad understanding of market demand is crucial for any long-term investment. For instance, the World Health Organization predicts that by 2050, the global population aged 60 and over will double, which only strengthens the case for the ongoing need for healthcare services and products.
3. A Strong Competitive Position
Even in industries with ongoing demand, the key question is whether the company can retain its competitive edge. What makes it difficult for competitors to steal customers or erode profitability? Look for businesses with a “moat,” or protective barriers, like high switching costs, network effects, or strong intellectual property.
While today’s competitive advantages are important, it’s crucial to account for potential disruptions. A company’s ability to withstand game-changing technological advances is vital. However, focusing on industries where innovation is slower—like the beverage industry—can offer greater confidence that the business will maintain its dominance.
4. A Proven Track Record of Innovation and Adaptation
Companies that can survive and thrive over the long term are those that embrace innovation and adapt to new realities. Phil Fisher, a key influence on Warren Buffett’s investing philosophy, emphasized the importance of businesses that are capable of evolving. Today’s advantages might be eroded by tomorrow’s innovations, so it’s vital to invest in companies that demonstrate adaptability.
The pharmaceutical industry exemplifies this quality, as large firms use their current resources to fund research and acquire promising startups with cutting-edge treatments. Similarly, Microsoft’s transition to cloud computing and the development of Teams to compete with Slack shows how even entrenched companies can adapt to shifting trends.
The Dream Scenario
Finding a business that meets these four criteria—understandable, in a growing market, with a strong competitive position, and an ability to innovate—is a powerful foundation for a “forever investment.” Such companies have the potential to generate significant cash flow and reinvest profits for long-term growth, creating value far beyond short-term market fluctuations.
Ackman’s perspective on Howard Hughes reflects this kind of potential. He believes the company’s land holdings and master-planned communities will continue to generate robust cash flows for decades. By reinvesting that capital into new opportunities, Ackman aims to transform Howard Hughes into a modern-day Berkshire Hathaway.
For investors seeking long-term growth, identifying companies that satisfy these four qualities may lead to a rewarding, enduring portfolio.
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