There are no shortage of successful investors, but few can hold a candle to billionaire Warren Buffett's track record.
Since the Oracle of Omaha took over as CEO of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) in 1965, he's overseen the creation of more than $600 billion in shareholder value and delivered an average annual return for the company's Class A shares (BRK.A) of 20%. In aggregate, we're talking about a return of better than 3,300,000%, including year-to-date gains.
In other words, when Buffett buys or sells a stock, Wall Street and investors tend to pay close attention. That's because piggybacking on Buffett and his investing team has been a profitable venture for a long time.
At the moment, I share five holdings in common with Warren Buffett's portfolio, three of which happen to be stocks I have no desire to ever sell. This fits right in with Buffett's core thesis of holding high-quality businesses for "long" periods of time.
The first Warren Buffett stock I plan to hold forever is e-commerce giant Amazon (NASDAQ:AMZN).
Most everyone is familiar with Amazon for its extremely popular online marketplace. You probably know Amazon is the go-to place to buy goods online, but you may not know just how dominant its platform is. According to a report from eMarketer in August, Amazon is estimated to handle $0.41 of every $1 spent online in the U.S. this year. For comparison, Walmart is the next-closest competitor, and Amazon has more than quintupled the online retail share of Walmart in the U.S.
Admittedly, retail margins are pretty low, and retail sales can be fickle from one year to the next. To counter this, Amazon has aggressively promoted its Prime membership. While the 200 million Prime members receive perks like free two-day shipping and access to exclusive streaming content, Amazon generates tens of billions of dollars in additional sales from the annual fee associated with these memberships. This extra revenue helps buoy the company's thin retail margins and allows Amazon to consistently undercut brick-and-mortar retailers on price.
While it's great that Amazon is bringing in so many people through its marketplace, the company's cloud infrastructure services arm, Amazon Web Services (AWS), is where the meat-and-potatoes of its long-term growth lies. AWS is the largest cloud infrastructure provider in the world, with over $59 billion in annual run rate sales, through June 2021. With more businesses than ever migrating their data into the cloud and establishing an online retail or service presence, AWS still looks to be in the early innings of its growth.
What's more, Amazon's faster-growing operating segments also happen to be its highest-margin divisions. AWS, memberships, and advertising should help the company's operating cash flow more than double by mid-decade.
My belief that Amazon will one day become the most valuable company in the world remains unchanged.
Another Warren Buffett stock with set-it-and-forget-it qualities is payment facilitator Mastercard (NYSE:MA).
One reason Mastercard is such a trusted stock to own is its cyclical ties. Mastercard benefits when the U.S. and global economy are expanding because businesses and people will generally spend more. Conversely, payment revenue often declines when recessions arise as businesses and consumers holster their discretionary income. Although recessions are an inevitable part of the economic cycle, they usually only last for a few months to a couple of quarters. Meanwhile, economic expansions typically last for years. Thus, for patient investors, Mastercard is a no-brainer buy that takes advantage of long periods of economic expansion.
It certainly doesn't hurt that Mastercard holds significant credit card network purchasing volume share in the United States. While it remains well behind rival Visa, being the No. 2 in the largest market for consumption in the world isn't a bad place to be.
Investors can also take solace in the fact that Mastercard sticks to processing and isn't a lender. While it could be reasonably argued that the company is giving up an opportunity to generate interest income and fees during long periods of economic expansion, the counterargument is that it doesn't have to set capital aside to cover credit delinquencies that inevitably arise during economic contractions and recessions. Not being directly affected by recessions allows Mastercard to bounce back quicker than other financial stocks, as well as maintain a profit margin of more than 40%.
Furthermore, the Mastercard growth story is nowhere near complete. While it's in a later inning of its growth phase than Amazon, there remains the potential for sustainable low double-digit growth for a long time to come. Since a majority of global transactions are still being conducted in cash, Mastercard's opportunity to promote credit payments, as well as expand its infrastructure to a number of underbanked regions (e.g., Southeastern Asia, Africa, and the Middle East), remains intact.
Bank of America
Similar to Mastercard and other financial stocks, BofA is going to benefit from the disproportionate amount of time the U.S. and global economy spends in expansion mode, relative to recessions and contractions. Even though downtrends in the U.S. economy are inevitable, bank stocks typically benefit from years of increasing loan activity and deposits, compared to a couple of quarters of reduced interest income and higher loan delinquencies.
Arguably the biggest catalyst for Bank of America looks to be the eventual rise of interest rates. No money-center bank is more interest-sensitive than BofA. Following the company's recently released third-quarter report, it notes that a 100-basis-point parallel shift in the interest rate yield curve over 12 months would generate an extra $7.2 billion in net interest income. When the Federal Reserve does taper its quantitative easing measures and orchestrates an orderly increase in interest rate, no big bank will benefit more.
Equally impressive has been the company's push to improve its operating efficiency. CEO Brian Moynihan has overseen a big digitization push. The number of users banking online or via mobile has increased by nearly 5 million over the trailing three-year period to 40.9 million. More importantly, 43% of all sales in the third quarter were completed digitally, up 16 percentage points from the comparable period in 2018.
With fewer people using in-branch and telephone-based financial services to complete transactions, Moynihan has been able to consolidate some of BofA's branches to lower expenses on the consumer banking side of the business. Not surprisingly, Bank of America's efficiency ratio has been steadily improving.
While BofA isn't the steal it was when I first purchased it back in 2011, it still has an exceptionally bright future with a high-quality loan portfolio.