3 Stocks Buffett Will Not Sell

When Buffett was asked about his brief foray into buying and subsequently selling McDonald’s stock decades ago he made a comment that offered a rare insight into the framework he uses to evaluate the long-term merits of a firm. While it’s well-known that he likes a company to have an enduring competitive advantage, it’s not as clear to many what that actually means.

Buffett lifted the veil for a moment to share that he wasn’t confident that McDonald’s customers would come back again and again as loyally to buy burgers there as they would to buy soda from Coca Cola or razor blades from Gillette. The likelihood of a man waking up one day and changing his choice of razor blade is far lower, in Buffett’s eyes, than a hungry diner selecting a local burger joint over McDonald’s.

The anecdote offers insight into Buffett’s phrase that he’s never seen a business that delights its customers go out of business. In the McDonald’s vs Coca Cola example, he views customers as being so pleased and loyal with Coca Cola that they simply won’t entertain other options whereas the same likely won’t hold true for diners.

With those insights into how customer behavior drives loyalty, it’s clear why three stocks he owns that represents over 60% of his portfolio will likely never be sold.

First up is Tim Cook’s firm.

Key Points

• Buffett favors firms with high customer loyalty and low churn rates that enjoy enduring competitive advantages.
• Apple users are unlikely to give up their devices and so their high attention and delight with Apple products are likely to sustain long into the future.
• Amex and Coca Cola users are also highly loyal for different reasons, meaning Buffett is unlikely to sell either stock anytime soon.

Apple

Buffett believes that some of the most loyal customers of any product on earth are those who shop at Apple. Not only does the app ecosystem lock customers into the iphone and iPads but the attention per day that customers allocate to their phones suggests that they will never be given up.

As one Apple executive commented to us when we noted how Facebook was renowned for capturing an hour a day of their audience’s attention whereas Apple’s devices capture often an order of magnitude more over the same time period, “Apple plays chess while others play checkers.”

With no signs of Apple users spending less time on their devices, the odds of Buffett selling shares is low. In fact, he commented that his prior sales of Apple stock a few years ago were likely a mistake.

Coca Cola

Customer loyalty to Coca Cola is a primary reason why Buffett has stuck with his investment in the beverage maker for so long but it’s not the only reason.

While the rest of us can buy Coca Cola and earn a yield of around 4%, Buffett bought so long ago that his dividend payout on his original principal annually is closer to 50%.

If you could earn that percentage annually on your originally invested capital, you would have little to no incentive to sell not only because of the high return but also because of the tax consequences of selling. For these reasons, the odds of Buffett selling Coca Cola ever are slim to none.

American Express

If you’re an American Express credit card user, you are likely already familiar with the exceptional perks and customer service. For example, if you lose your card, Amex will probably get you a replacement in the mail faster than any other credit card company or financial institution.

Moreover, American Express has a built in mechanism to protect it through boom and bust cycles. When credit card holders are heavily indebted, Amex enjoys higher income from interest charges. And when the economy is going gangbusters and interest rates charges are lower, annual fees support revenues. Either way, Amex wins.

That’s the kind of business model Buffett favors and it’s one of the reasons he’s unlikely to sell his American Express shares anytime soon.