This Is What You Need to Find Lifelong Love for Your Stock Portfolio

By Markets Fool.com

As it turns out, investing and marriage can share a lot of attributes, particularly the long-term commitment.Just as you should exchange wedding vows with an expectation that they will be in place for many years to come, the Motley Fool believes the same should hold true for many investors before they pour their money into a company's shares.

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On this episode of Motley Fool Answers, Alison Southwick and Robert Brokamp are joined by Jason Moser as he breaks down what he looks for in a "never-sell" stock. From the company culture to its strategy and valuation, these are the attributes that leading companies often share as they deliver strong returns for their shareholders year after year (or decade after decade). The Answers team also welcomes some Motley Fool analysts to share their own picks for lifelong, investing matrimony.

A full transcript follows the video.

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This podcast was recorded on August 2, 2016.

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Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I am joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. But wait!

Robert Brokamp: Wait!

Alison: One more!

Jason Moser: Wait, wait, wait.

Alison: We have a special guest and that is Jason Moser!

Jason: Yes, ma'am.

Robert: Yay, Jason.

Alison: Jason joins us to talk about the attributes of a never-sell stock. The stocks you want to have and hold forever and ever. We'll even get some never-sell stock ideas from a few analysts. We're also going to answer your question about adjusting money priorities when life gets unpredictable. All that and more on this week's episode of Motley Fool Answers.

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Alison: It's time for Answers, Answers and today's question comes from [Abby] in Washington, D.C. She writes: "I'll soon be headed to business school and my question is about this new phase in my life. Do you have advice for someone whose finances are about to turn upside down? I'm going to transition from saving earnings to spending savings, and my new world will be very unpredictable and rife with situations where I have to assess whether a trip, special event, etc. is worth the extra cost. Any advice for how to set and keep my new financial priorities?" She also writes, "P.S. Alison, all clogs, all day here. Rock on!"

Alison: Rock on, [Abby].

Robert: Rock on.

Alison: I agree.

Robert: Well, every situation exemplifies an important financial planning concept, and that is life transitions are financial disruptions. Whether it's going to school like she is, or graduating from school, or sending your kids off to school, marriage, divorce, birth, death, job change, moving, retiring ... these will have some sort of impact on just about every aspect of your financial planning ... so from your taxes, insurance, income, expenses.

And you can understand a situation like [Abby], where she's a little freaked out, maybe, and wondering how all this is going to affect her future and her savings.

There's really only one way to handle that, and that is to come up with basically a three-to-five year financial forecast for yourself. I know that doesn't sound very exciting, but I can tell you I recently did it, myself, because I am also in the middle of a life transition. I'm moving at a point when I have two teenagers who will be going to college in a couple of years. I might have to get them a car. My youngest kid needs braces. So I figured the only way to really understand how all these things move together is to create a spreadsheet and map out the next three to five years.

What you'll find, [Abby] (and anyone else who's going through any major transition), is different ways that your expenses will change. For her, if she's working now but then becomes a student, her taxes are going to go down significantly. She's probably leaving her employer's health plan and doing probably the school's health plan. How does that change her expenses?

For us, when I was analyzing how my kids going to college will affect our expenses, obviously we'll have the expense of college, but I also will have the expense of saving for college going away. I also expect I will not be spending as much on food and utilities once the kids move out.

Alison: Moochers!

Robert: That's right. But besides just an average budget, you have a net worth component to this. For us, it was how much we saved for college. For [Abby] it will be just her savings. It will be helpful for her if six months from now she says, "I want to take this trip and it's going to cost me $1,000." She can put that into her spreadsheet and say, "If I do that, how does that affect my finances three to five years down the road? Am I OK or not?"

I think that's really the best way for her to handle the situation and anyone evaluating any major transition, especially people who are about to retire. But a job change or moving to a new location just about every aspect of your finances will be affected.

Alison: It probably helps to look five years in the future, like you said, because also business school will have passed. Like this is a temporary, painful time for her, but in five years she'll be through it and she'll hopefully be making bank at some awesome consulting firm in D.C.

Robert: Exactly. I recently wrote an article about this, and one of the components that I think is important is get expert input. So for her situation, she should...

Alison: She came to you, by the way. Sorry you're the expert input on this.

Robert: I'm so sorry, [Abby].

Alison: Sorry, [Abby]. [00:04:19] He's recommending finding other experts.

Robert: Right. But related to what you said about [Abby], she should have a realistic idea of how much she's going to make when she finishes school and be able to figure out, "If I do this over the next two or three years, how does that look three to five years down the road?"

For me, I sat down with our CFO, Ollen Douglass (former guest on our show) and said, "Where's the company going? What's a reasonable expectation for my income over the next three to five years?" Then I put that into my five-year forecast and said, "Given all that, I think we'll be OK with this size of a mortgage and that our kids probably will go to school." Probably.

Alison: They're going to go to school.

Robert: They're going to go to school.

Alison: All right, [Abby]. I hope you find that helpful and since you are in the D.C. area, if you ever find yourself in Old Town, feel free to swing on by. Just give us a warning, first, so we can roll out the red carpet.

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Alison: Dearly beloved, we are gathered here, together, today, to join this investor and this stock forever in investing matrimony.

Robert: Da, da ... da, da, da, da, da Is that the wedding theme?

Alison: There's a lot of different wedding themes.

Robert: That is a wedding theme.

Alison: You could have gone Pachelbel's Canon. The point is that here at The Motley Fool we are long-term investors, and so the idea of investing in a stock for three, five, or 10 years ... that ain't no thing ... but investing in a stock forever! A stock that you'll have and hold forever!

Jason: It sounds like such a long time.

Alison: It does sound like such a long time. So Jason Moser joins us here, today. He is an analyst with Motley Fool's Million Dollar Portfolio service.

Jason: Si.

Alison: He also is a frequent guest on MarketFoolery. In fact, anyone who's out there who listens to the Howard Stern Show would have heard Jason Moser on there.

Jason: That was a nice nugget from the week. We owe that to one of our MarketFoolery listeners who actually pinged them over at the Stern show from something on Monday. Just kind of funny how that all worked out.

Alison: Yeah, that is funny. So kind of a big deal that Jason Moser joins us today. He goes from Howard Stern to our show!

Jason: How about that?

Alison: Thanks! Thanks for joining us. So never sell stocks. Let's talk about that first, because in general I feel like we invest in stocks so that someday we can cash them out for a ton of moola. So why would we have stocks that we want to hold essentially forever? Are we really talking about forever?

Jason: I'm glad that you asked that because I've had many people ask me that very question. It's one thing to consider yourself a buy-to-hold investor. We want to look at the long run versus the short run. That's our edge as investors. But yes, you're right. At some point you want to actually realize the fruits of your labor and cash in those gains.

It all basically depends on why you're investing in the first place. Many of us are investing in order to ensure our financial independence in our later years. Perhaps some people are investing because they want to leave their kids something after they pass on, and that's fine, too. It's all a matter of understanding, ultimately, what your goals are. Then once you can identify your goals, then you can identify if you really need to plan on holding this stock forever, or if forever really is like a 10 to 20 year time horizon because, honestly, that can make a big difference.

Alison: And honestly, how many people get married and they're like, "I'm going to love you forever," and then they get divorced. So, whatever. There's wiggle room.

Jason: But I think it's also worth noting that we three, here, are all married (not to each other, of course) but I think we're all still on our firsts...

Robert: You'd be so lucky, Jason.

Jason: ...for quite some time, and it seems to be working out for some people in this world.

Alison: We're all on our firsts. Yes, that's true.

Jason: I do think that's an important thing to note, and so when we say "never sell stocks" I think that's a little bit of hyperbole in that we really do focus on longer-term investing than most do.

Alison: So maybe we're talking more about a time horizon of 10 to 20 years.

Jason: Sure. I think 10 to 20 years is a pretty neat way to look at things. I'm 43 years old today. There are companies in my personal portfolio that I would love to still own when I'm 63.

Alison: Well, let's get into it. We've got a few different categories that we're going to look at when it comes to determining whether that stock is a "never-sell stock," and the first aspect we're going to look at is company culture.

Jason: Sure, culture.

Alison: Culture.

Jason: Culture's a big deal. We talk a lot about culture here at The Motley Fool because we're very proud of our culture, and speaking as someone who's worked at a number of companies, before, where the culture maybe wasn't as strong (or definitely wasn't as strong), culture can make a big difference.

It doesn't make or break an investment, but whenever we find a company that has a strong culture, that is a quality that we want to dig further into. Learn more about the company what it does, and why it may be a good investment understanding that when the business wins, it's not just the business at hand. It's all stakeholders involved (customers, employees, the world).

There are a lot of different companies out there that probably fit in this realm. You look at Under Armour, for example, from a perspective of an ownership structure that's vested and aligned with the interests of shareholders. Kevin Plank, the founder and CEO of the company, owns the majority voting rights of that company, and they recently undertook a stock split to insure that he would keep that power for many years to come.

Now I know some people are a little bit critical of moves like that. We've seen other companies like Google, for example, who have done the same thing, or I guess Alphabet is what it's called today. The flip side of that coin is he's got a pretty good track record. The company's now 20 years old and it is doing quite well. Investors in Under Armour have won all along the way.

Alison: So when we're looking at company culture, we're looking at happy, engaged employees. We're also looking at upper-level ownership stakes in the company, it sounds like.

Jason: And very driven leadership. Kevin Plank is known for having mottos all over their headquarters. Humble and hungry. They continually want to get better, but also not get too big of a head in the process. I think that Under Armour, generally speaking, has a pretty strong culture that we've noted for years at the Fool, and it's worked out to be a wonderful investment, thus far.

Alison: Let's talk about strategy next. Maybe they don't have a great strategy, but they're like the right business at the right time. Or maybe they do have a good strategy. I don't know. How do you judge strategy?

Jason: You talk about the right business at the right time. This recent Pokemon Go thing. Everybody's been wondering [whether] Nintendo is the next big thing. Well, Nintendo's been a public company for a while, now, and not a very compelling investment. It just goes to show that one little flash in the pan isn't necessarily going to change the game for a company like that.

Alison: Right.

Jason: But I think with strategy we look for companies with pricing power.

Alison: What is pricing power?

Jason: Pricing power is the ability to raise prices on your product or service without realizing any drop-off in traffic. Starbucks, I think, is the shining example of a company that sells an addictive product (coffee), and addictive in the sense that people don't really think about it being addictive. It's not like cigarettes. Cigarettes we know are very bad for you. Coffee, on the other hand, has been determined that in moderate amounts is actually pretty good for you. (I'm sure that probably is debatable, so we'll get an email or two telling me I'm wrong, and that's fine).

Regardless, people go into Starbucks day after day after day. They have Starbucks in their house every day. Coffee is just a ritual here in the States, particularly, but it's not just coffee. It's tea. They're getting their name into the juice game. They've got some food ideas. Starbucks has done a very good job of building a business based on repeat purchases, based on customer loyalty, and really has become a ritual for many people.

What that then affords them is pricing power. You will see that every once in a while they're able to raise prices on a cup of coffee. Maybe it's five cents. Maybe it's 10 cents. It doesn't seem like much to you, as the consumer, but when you multiply that times hundreds of thousands of beverages that they sling on a daily basis, it really adds up. And they've demonstrated that ability over the years, which is why it's worked out to be such a good investment.

Alison: The other day my husband and I went to get a cup of coffee, and I realized (not until after I bought that cup of coffee) that I paid like $3.50 for a cup of coffee. I said, "What just happened! How did that...? What did I...? I guess I better really enjoy this cup of coffee." But that gets to your point about they did it. They raised the prices on me and I didn't even think about it. I just bought it.

Jason: The other interesting thing is in today's society we're using mobile so much more in paying for things that a lot of times there's never any cash that changes hands. And when there's no cash that changes hands, you're less apt to actually note what you're paying. You'll notice it afterwards like you did, but you're not going to tend to look at it up front, because...

Alison: Just pull out your phone. Boop! Done!

Jason: ...it goes right through your phone and is done, so they've done a wonderful job of building up that mobile presence, as well. It's really paid off.

Alison: So strategy you want to look for pricing power. You want to look for a business model that's based on repeat purchases, recurring revenue, and that they're serving a big, growing, dynamic market. Does that sound about right?

Jason: No question. Mm-hmm.

Alison: Let's move on to the financials. Let's talk about financials. What are you looking for when it comes to the balance sheet? The income statement? How much do I have to dig into this?

Jason: What you want to make sure you have is a business that is not going to be beholden to the capital markets in order to do its thing for long, sustained periods of time.

Alison: What do you mean by the capital markets?

Jason: Having to take out debt by issuing bonds. Having to issue more shares to dilute shareholders in the process. It's nice when you see a business that generates a lot of cash via its operations. I think Chipotle is a very good example of a business like this.

We know that Chipotle owns all of their restaurants. They don't franchise, and they have somewhere around 2,000 today. But the restaurants, themselves, don't cost a whole heck of a lot to open up and get started. It's somewhere in the neighborhood of $800,000 or so. They realize the return on that investment, which is basically just getting back to break even via the sales from the restaurant somewhere in the neighborhood of a year to a year and a half, depending on where they open it.

Now from there, those restaurants just become virtual cash machines, and they're able to take that cash and redeploy it back into the business to open up more stores and grow their presence. All the while, they're able to build up their balance sheet with more and more cash. They don't have to take out debt. So all the while, here, they're able to self-fund growth at a deliberate pace according to their timeline. They never put themselves in a financial pickle, so to speak.

And in times like these they're just recovering from this big E. coli crisis this has been a big crisis. I think it's been the biggest test of their 22 or 23-year history. They have been very good about executing share buybacks at what they feel are very depressed levels of their shares today, so their share count is not going up. It's actually coming down and they're still recovering from this crisis OK.

So assuming we don't see any more headlines, and they've got their food safety standards in order, I think that 2016 is going to serve as a wonderful year to actually build or add to your position in Chipotle, because down the road, again, we talk about repeat purchases and businesses that have demonstrated pricing power throughout the years. Chipotle is another one that has done that, and it's done it in a fiscally fit way.

Alison: I'm a pretty novice investor, so it's seems kind of funny to me that we should invest in companies that are profitable.

Jason: Sure!

Alison: It's like that makes sense. I guess there are people out there who invest in companies that are not profitable.

Robert: Well, yeah.

Jason: And in today's tech world, that is very common. You see a lot of businesses that get started. They go public early in their lives and they have to invest so much up front to build out the tech in that business, that they aren't profitable for some period of time.

That's where you really want to take a look beyond the financials and understand exactly what the power of this business is. Is there a network effect or a utility where we can see this business being relevant 10 years from now? And if that's the case, then you can look past the financials at potential future earnings power and determine when and if they will become profitable.

Alison: The next one we want to talk about is the idea of safety. What does safety mean when we're looking at a company as a potential never-sell stock?

Jason: A lot of times we equate safety with risk. And I think when people think of risk, they're trying to figure out what the chance is that they're actually going to lose the money that they invest. So when we talk about risk, we're talking about, essentially, the permanent impairment of the capital that you're investing. If I'm going to invest $1,000 in this business today, what are the chances that I will lose all of my money? That really helps dictate the level of risk in the investment.

I think when you look at businesses today, you want to take a lot of these aspects that we talk about (culture, financials, strategy) and they all roll into the safety factor. We want to know that this company has good financials, a good business model, a good strategy, and a good culture. These all add up, along with things like knowing that they're not making all of their money from one particular item, or from one particular party.

I think Facebook is a great example of a business, today, that's so big, and has such a big reach, such a tremendous network from not only just Facebook, but from WhatsApp, from Messenger, from Instagram, and from whatever else they may decide to acquire. And let's face it. They will have the power to basically do whatever they want because of their size. We know that's going to be a pretty safe investment, at least for the foreseeable future.

And again, just because it's safe today doesn't mean it's going to be safe a year from now or five years from now. You always want reassess those types of things. But I think that a lot of these things that we talk about feed into that safety assessment and it's certainly one you want to give due attention.

Alison: And the final thing we're going to talk about is valuation.

Jason: Sure. Everybody now go to sleep. [Snores]

Alison: For just a little bit. I'm just going to close my eyes. I'm not actually going to be asleep. I'm still listening.

Jason: I think a lot of people do, too, when it comes to valuation because it seems like it's the boring part of investing. It requires some math. Maybe it's not the most fun in the world. I get a kick out of it.

There are two schools of thought, I guess. There's some investors who don't really focus too much on valuation, and then there are other investors that focus, maybe, too much on it. I like to find the middle here. I think price always matters, ultimately.

Alison: I'm sorry. I should take a step back. Valuation, of course, being the value that the market believes the company is worth as opposed to how much the company, itself, is worth on the balance sheet.

Jason: Right. We look at the stock, today, and it's selling for however many dollars, and there's a price/earnings ratio that's tacked on there that tells us basically a multiple. It gives us an idea of how expensive or how cheap the stock is today. There are many ways to assess valuation. It's not just a P/E ratio. You can build out discounted cash flow models. You can build out simple earnings models. You can look at multiples. Compare them over time.

Again, there are quantifiable aspects when it comes to valuation that are very easy to figure out when we look at a business like Under Armour or Starbucks, but there are qualitative factors that come into a valuation that are less easy to put a number around. We talk about the quality of the business. The quality of leadership. The quality of the competitive position that it has.

I think Amazon is a great example of one that historically has been super polarizing. Everybody who's on the bearish side is bearish, basically, because they think the stock is too expensive. They've been saying that every step of the way, and they've been proven wrong, obviously, every step of the way. There are a lot of qualitative factors that go into that business that the numbers don't quite bear out. I think they've built out a tremendous network, there.

Alison: How do you put a price on a CEO like Bezos? How do you put a value on his strong leadership and his vision?

Jason: That's a really great point. He has this mentality when he wakes up, every day, where he feels threatened. He feels threatened by his competition. He's threatened by disruption every single day, and that's the way that he approaches that business. That's why he's always relentlessly trying something new and building out that business.

You can now see between the retail operations that they've developed between the Amazon Web Services operations that they've developed if we just eliminate the math, here, and just say that if you closed Amazon's doors tomorrow, the world would basically stop turning. Netflix would stop working. I think that really gives people a better idea of how important Amazon is today.

Alison: Why would Netflix stop working?

Jason: Because Netflix runs off of Amazon Web Services.

Alison: Oh, really?

Robert: And the world runs on Netflix, therefore...

Jason: Right. And the world runs on Netflix...

Robert: ...if Amazon went away...

Jason: ...everybody would have a conniption fit at once.

Alison: Oh, man.

Jason: But I think that's just one example of what they've done. They've really helped define this new e-commerce age, and there's still plenty of opportunity out there. And he basically sees it as kind of the Wild West, a big land-grab, which [explains] why they're doing it.

So I think with valuation, the bottom line is if you feel like you have a stock that you really like ... a business that chimes in on everything that you're looking for, yet seems like it's too expensive ... the way I look at that is I consider taking a small position. If it's a business I want to own and valuation is the only thing stopping me, there's nothing that says I can't build up a position in that company. I can buy a little bit now, follow it, and then opportunistically add when I feel like the valuation presents opportunities. That's one way to look at valuation and not let it stifle you from ever getting in on some of the best stories we've seen here at The Motley Fool.

Alison: So when it comes to valuation, look at the quantitative as well as the qualitative...

Jason: Yes...

Alison: ...and if it still seems a bit too pricey, a little bit at a time...

Jason: I think that's a safe way...

Alison: Ease on in.

Jason: ...to do it.

Alison: All right, Jason. That covers it for what we like to look for in a never-sell stock. Thank you, Jason. Thank you for joining us today.

Jason: Thank you.

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Alison: Before we go, let's get some more ideas for some never-sell stocks. I asked a few analysts at The Motley Fool, and also a few portfolio managers down with Motley Fool Asset Management (also a sister company of The Motley Fool) and here's what they had to say.

Bill Mann: My name is Bill Mann. I'm the chief investing officer for Motley Fool Asset Management. A stock that we have held, since the day my now 16-year-old daughter was born, is Costco. It is a company that has, over time, been expensive. Been cheap. Visited a bunch of different prices, but it's one that I really, personally have no interest in selling simply because they have one of the best management teams and the best cultures that I've ever seen in a retailer. They have lots of room for growth. I really can't see them ever being pushed off of their pedestal.

David Meier: I'm David Meier, portfolio manager at Motley Fool Asset Management. I think my never-sell stock would be Google, known today as Alphabet. This is a company that led the digital-data revolution and it continues to lead it. I think given its assets, given its management team, and a relatively attractive stock price, I would be very hard-pressed to sell this one ever.

Nate Weisshaar: My name is Nate Weisshaar. I'm a portfolio manager at Motley Fool Asset Management. There really isn't a hold-forever stock in my mind. There's always a price for something and if someone's being generous enough, I'm happy to let it go.

Alyce Lomax: Hi, I'm Alyce Lomax. I'm an analyst for Motley Fool ONE. My never-sell stock is Starbucks. It has been a stock that I've held through thick and thin. I already held it during the financial crisis. I kept on holding it. It has done great for me, and I feel like Howard Schultz is the type of leader who will never let me down over the long term.

Buck Hartzell: Hi, I'm Buck Hartzell, director of investor operations here at The Motley Fool. I would never say I will never sell a stock, but there are a lot of stocks that I intend to never sell and hope to never sell, and Markel, out of Richmond, Virginia, is one of those. A mini Berkshire-esque type of company. A great insurance company. They own a lot of companies that are unrelated to insurance. There's going to be a lot more of those. With a great management team of around 25 to 30 years.

Alison: Thanks to Bill Mann, Dave Meier, Nate Weisshaar, Alyce Lomax, and Buck Hartzell for their never-sell stock ideas.

Disclaimer time: As always, The Motley Fool and our analysts may have formal recommendations for or against the stocks we just talked about. Don't buy and sell stocks based solely on what you hear on the show.

That'll do it for today's show. Our email is Answers@Fool.com. I don't have anything else to say. Bro, you were pretty quiet this episode. Everything OK?

Robert: Yes, everything's OK. It's just Jason is so wise and smart, there's no reason for me to jump in and distract him. Just let him keep on going.

Alison: The Moser train just keeps on going down the track.

Robert: That's right.

Alison: Whoo-whoo! The show is edited eternally by Rick Engdahl. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of Costco Wholesale. Alyce Lomax owns shares of Chipotle Mexican Grill, Costco Wholesale, Facebook, and Starbucks. Bill Mann has no position in any stocks mentioned. Buck Hartzell owns shares of Markel. David Meier owns shares of Facebook. Jason Moser owns shares of Chipotle Mexican Grill, Markel, Starbucks, and Under Armour (A Shares). Nate Weisshaar owns shares of Markel. Robert Brokamp, CFP owns shares of Facebook, Markel, and Starbucks. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, Chipotle Mexican Grill, Costco Wholesale, Facebook, Markel, Netflix, Starbucks, and Under Armour (A Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.