I own dozens of stocks, and diversification is important to me. I like the idea of letting winners run and losers become a smaller part of my portfolio.
But what if I could only buy and hold a single stock? My first inclination would be to go with a holding company like Berkshire Hathaway because it’s invested in many other publicly traded companies. However, if I had to exclude such “ETF-like” stocks, the decision would be more difficult.
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I evaluate multiple factors before buying a stock. The things I consider are likely the same as those of most other investors — valuation, management, track record, etc. Two criteria stand out above all the others, though.
First, I want the businesses I invest in to have a strong moat. Back in the Middle Ages, heavily fortified castles had moats full of water surrounding them to help protect against invaders. Business moats have a similar objective — protecting against competition.
Moats come in several forms. Some that I especially like are network effects (where the value of a company increases as it gains additional users/customers) and cost advantages.
Second, I seek to buy stocks with multiple paths to growth, or optionality. This is important because sometimes, a company with only one avenue for growth can run into a roadblock. Companies with optionality can easily move into new arenas to fuel growth.
Several stocks have strong moats and optionality. However, my favorite right now is Amazon(NASDAQ: AMZN).
I use Amazon’s products and services pretty much every day. I’m an avid reader using the company’s Kindle e-reader and subscribe to Kindle Unlimited, which gives me access to millions of books. My family frequently orders products using Amazon Prime and watches TV shows and movies on Prime Video. We have Echo devices that incorporate Amazon’s artificial intelligence (AI) assistant, Alexa.
Every person, like me, who subscribes to Amazon Prime or Kindle Unlimited makes Amazon more attractive to advertisers and publishers. That makes Amazon more valuable — which is the network effect in action. One main reason my family uses Amazon so often for shopping is its low costs — an example of the company’s cost-advantage moat.
I like that Amazon continues to relentlessly strive to lower its costs even more. The company’s focus on regional product fulfillment close to its end-customers is paying off. So is its innovation in automation, including the use of robots in fulfillment centers.
Amazon could be the poster child for optionality. After all, the company started as an online bookseller and then expanded into a full-blown e-commerce marketplace. Next, the company opened up its data infrastructure to external customers with Amazon Web Services (AWS). Today, AWS ranks as the world’s largest cloud service provider. I expect AWS will continue to deliver tremendous growth for years to come as organizations move their apps and data to the cloud to harness the power of AI.
Jeff Bezos, Amazon’s founder and executive chairman of the board, once said, “Your margin is my opportunity.” His words still ring true, as Amazon has moved into the pharmacy and medical clinic businesses.
Is there anything about Amazon I don’t like? Sure. I’d prefer that its valuation wasn’t so lofty. However, history has shown that earnings-based valuation metrics don’t mean as much with Amazon as they do with other stocks.
That brings me to what I view as the operative word in my case for Amazon as the single stock I’d want to buy and hold. The most important word is “hold.” Anyone who has held Amazon long enough has been a huge winner.
I don’t know whether or not the stock will deliver huge gains over the next 12 months. However, I’m confident that if I hold Amazon over the next 10 years, I’ll enjoy solid returns. The company’s strong moat and multiple paths to growth should ensure 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 has positions in and recommends Amazon and Berkshire Hathaway. The Motley Fool has a disclosure policy.
