Warren Buffett is the most famous investor in the world. He's known for several reasons, including his favorite holding period, which is forever.
For those trying to emulate Buffett's investing style, it's essential to find stocks with solid long-term outlooks. That's one of the things the Oracle of Omaha insists on. And thankfully, he doesn't leave investors in the dark.
Many of Buffett's stocks that he has invested in have the characteristics of businesses that can provide excellent returns to investors who stay put and enjoy the ride. Let's consider two examples: Visa(NYSE: V) and Buffett's own Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B).
1. Visa
Visa is worth investing in and sticking with for several reasons. Its business is highly profitable, boasts great margins, benefits from a strong moat that keeps competitors at bay, and has excellent long-term growth prospects. Let's unpack that a little more.
First, Visa is the leading digital payment network provider. It helps facilitate millions of card transactions daily and pockets a fee for every single one.
The company doesn't issue credit cards -- that's the role banks play in this equation. It merely operates a payment processing network.
That means Visa is insulated from credit risk, or the possibility that borrowers will default on their credit card payments. And since it has already set up this network, additional transactions don't add much to its cost of goods sold, leading to wide margins. Visa's gross and net margins typically hover about 80% and 50%, respectively.
V Gross Profit Margin (Quarterly) data by YCharts.
Second, Visa's competitive edge stems from the network effect -- the value of its platform increases with use. The more consumers join the company's payment ecosystem, the more attractive it becomes to merchants, and vice versa.
For businesses that don't yet accept credit cards as a form of payment, Visa is the way to go if they change their minds. New payment processors will have trouble convincing companies to join their networks when these companies can join Visa, which already has millions of consumers.
Third, Visa still has plenty of room to grow. Although the company's business has expanded by leaps and bounds, the transactions it seeks to replace, which include cash and checks, are still common.
Visa sees a $20 trillion opportunity -- it generated revenue of about $35 billion during the trailing-12-month period. That's an enormous runway for growth. It won't capture this entire market by itself, but grabbing even a fraction -- say 5% -- would keep its revenue and earnings moving in the right direction for a while.
And here is a bonus reason to invest in Visa -- its dividend. The company has increased its payouts by 333% during the past decade. Reinvesting the dividend will help boost long-term returns for Visa and its shareholders.
2. Berkshire Hathaway
Visa has been one of Warren Buffett's favorite stocks for more than a decade. But Berkshire Hathaway, the company he's led for several decades, may be at the top of that list.
What makes Berkshire Hathaway such an outstanding stock to own? In short, its management team. By buying shares of the company, investors are arguably letting the best investors ever help them earn market-beating returns.
Some might point out that Buffett is well into his 90s and won't be around forever. And his longtime investing partner Charlie Munger died almost a year ago. However, Buffett is smart enough to know he isn't immortal and has built a business and culture that should outlive him.
Consider that Berkshire Hathaway is actually a rather small operating company. It owns plenty of subsidiaries, including famous brands in various industries. Insurance giant Geico might be one of Berkshire Hathaway's more famous businesses, but it also owns the popular battery company Duracell, clothing specialist Fruit of the Loom, and more. The company's subsidiaries, which operate with a high degree of independence, grant it significant diversification.
Will the company remain as successful once Buffett is gone? The available evidence suggests that it will.
Buffett has already handpicked his successor, Greg Abel, currently the vice chairman of Berkshire Hathaway's non-insurance operations. He wouldn't have picked Abel unless he thought the man could reasonably lead Berkshire Hathaway. Even though Buffett's long tenure is approaching its end, this terrific company is in good hands and should continue delivering excellent returns for a long time.
Investors can confidently hold Berkshire Hathaway's shares for good.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Visa. The Motley Fool has a disclosure policy.
