Ever notice how Warren Buffett likes to say his time horizon for an investment is “forever?”
He and his tag team partner Charles Munger also have a tendency to pull out some old Dow Jones Industrials table (the one I saw was from the Buffalo Evening News in 1911 on page 71 of the expanded 3rd edition of Poor Charlie’s Almanack) and point how all the companies on that list (normally except General Electric) no longer exist.[1]
Wait a minute.
If the death rate for companies, major companies at that, is so high in the long run why in the world should anyone invest with a “forever” time horizon?
If someone in 1911 had thought along the “forever” lines he and/or his descendants would likely be broke.
Ever since Heraclitus we’ve known the world is always changing.
Not only that: the most consequential changes are often impossible to predict (see The Black Swan, N. Taleb; Deep Simplicity, J. Gribbin).
So why bother with a “forever” investment horizon at all?
Well to be honest, I would only use it as a tool to determine which company, among a group you are thinking about investing in, has the best chance of making money in the near term.
For example, let’s say you are thinking about investing in Coke, Microsoft or Caterpillar.
Now you get into your “forever” mode of thinking.
I would select Coke as the best investment from a “forever” point of view.
Why?
Microsoft is in a fast changing industry.
Technology advances are notoriously hard to predict.
Chances are good that 100 years from now Microsoft will not exist, if not sooner (think AT&T).
Caterpillar’s profits are tied to various types of machinery used in heavy industry.
Ignoring current competitive threats from non-US makers of similar equipment, who really knows what folks will be using in construction and mining in 100 years.
Could anyone 100 years ago have foreseen our current earth-moving technology?
Coke faces similar threats but in my opinion to a lesser degree given the nature of its product: people drank wine 500 years ago; they’ll probably be drinking wine 500 years from now.
Does that mean Coke will be around and making money 100 years from now?
Who knows?
The product may be around but owned by a different company. Maybe a new force will emerge in the beverage industry and topple the giant.
But drastically negative outcomes are, in my opinion, less likely for Coke than for Microsoft or Caterpillar.
So what does this mean?
That, all else being equal, you can be fairly confident of Coke’s future prospects for 5-10 years and no more.
In other words, when you find a company you think will be a great investment “forever” all you’ve found is a company with a very high likelihood of success in the short term (which, I might add, is a very useful thing to know).
At least that’s how I think about it.
If you find yourself growing overly comfortable and falling for the old “I’m a Rip Van Winkle type of investor, I picked a great company and I don’t need to worry about this investment anymore” line that would be the time to pull out an old Dow Jones Industrials table and reflect on the awesome power of competition.
(Disclosure: the author of this post holds no positions in any of the securities mentioned at the time of writing).
[1] I have refrained from providing specific references for the “forever” time horizon and the stock chart example because you can type the words “Buffett forever time horizon” into any search engine and get plenty of hits. You can also look-up “Buffett punch card 20 choices” for another example of the “forever” time horizon approach to investing.
