Here is the company Warren Buffett will “own for the next 50 years” from 2000
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Warren Buffett rarely gives advice on which stocks to buy. But in 2000 Berkshire Hathaway Annual Meeting, the former CEO gave one name as an area for investors to consider.
According to Buffett, one business was so powerful that if a person could only own one stock for the next 50 years, it would be difficult to find a better person. Imagine what it was.
Costco
That’s right Costco (NASDAQ:COST). In Buffett’s words: “Costco is a great company… If you had to pick one company to own for the next 50 years, you’d have a hard time finding a better one than Costco.”
It’s understandable. But the really interesting thing isn’t there which stock Buffett has been identified but why he chose it. It also has to do with the company’s business model.
Like most businesses, Costco uses economies of scale to generate cost savings. It then passes this on to consumers in the form of lower prices, creating strong customer loyalty.
Lowering prices also makes things more difficult for competitors. Whenever another retailer raises their prices, Costco looks more attractive by comparison.
The process is self-reinforcing. Attracting customers helps to increase the company’s scale, which increases its cost benefit, allowing it to lower prices and more, attracting more customers.
The stock used to be part of Berkshire’s portfolio, but the company sold its stake, which Buffett later described as a mistake. And it looks expensive to buy at today’s prices.
The question for investors is where to find companies like Costco with shares trading at very attractive prices. And I think the place to look might be FTSE 100.
The Compass Group
The Compass Group (LSE:CPG) is a contract services business. That’s a different industry than grocery stores and it can be cyclical, as investors have seen recently.
A recession can force companies to cut back on foreign spending, which threatens demand. But while this is risky, there are striking similarities between the firm’s business model and Costco’s.
Compass has a huge advantage, being the largest company in its industry and equaling the size of its two competitors combined. And uses this to buy ingredients in bulk.
This creates economies of scale, which gives the company a cost advantage. This allows it to be competitive when it comes to contracts, but it’s not the only matchup with Costco.
One of the most attractive things about Costco is the membership structure. Customers pay subscriptions to shop at their stores – and Compass has something in common.
The Company allows third parties to use the food shopping platform and benefit from the associated savings. But it charges them a fee for doing so, which increases its quality and profits.
Investing for the long term
The first thing Warren Buffett cited in supporting Costco was its business model, rather than its growth potential or profit margins. I think this is amazing.
Not many companies can do what Costco does, but Compass is probably one of the closest comparisons. And it’s one that I think investors should consider buying with the intention of owning it for the next 50 years.
