Doc’s note: Investing doesn’t need to be hard work. In fact, one of the best things you can do is… nothing.
One of the most consistent, safest ways of growing your wealth is finding shareholder-friendly businesses with solid balance sheets and holding them for a long time.
Today, we’re sharing an essay from Brett Aitken, an analyst for Stansberry’s Investment Advisory – Porter’s flagship newsletter. It’s all about the easiest way to grow your wealth. Even billionaire investor Warren Buffett uses this strategy. And once you start on this simple path, you’ll be surprised at how your wealth grows steadily and safely.
There is a simple path to wealth…
It doesn’t require much work. It doesn’t require much knowledge. You don’t have to be lucky, or even all that good.
You just have to learn one simple concept: capital efficiency.
It’s one of our favorite strategies… finding companies that generate massive amounts of cash without having to pour huge sums back into the capital investment to keep the business going and growing.
They don’t have to spend much money investing in their businesses because their primary asset is their well-established, good reputation.
If you love Hershey chocolate, you’re not likely to switch brands. As long as Hershey delivers the same high-quality product at the same reasonable price, you’ll stick with it. Hershey doesn’t have to build lots of new plants or constantly create new products. It doesn’t even have to spend a fortune on advertising. It has an installed, loyal, and ready base of buyers… and a large moat around its business, thanks to brand loyalty.
If you’re prepared to hang on for the long haul, investing in capital-efficient companies with dominant brands is one of the simplest paths to great wealth.
Just ask legendary investor Warren Buffett…
This strategy has made Buffett one of the richest people on the planet.
For example, look at the huge stake that Buffett took in the iconic soda brand Coca-Cola back in 1988. At the time, he told shareholders…
We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.
Business magazine Forbes ranks Coke as the world’s fourth-most valuable brand. Without taking away anything from the company’s management, Coke is a simple business. It made soda 100 years ago. It makes soda today. And it will be making soda in another 100 years. Sure, packaging and marketing campaigns change. But not much (if anything) has changed about the company’s core product, Coke.
It also gushes cash…
In 2015, Coca-Cola sold more than $44 billion in product. It operates on gross margins of around 60%, meaning it produced nearly $27 billion in gross profits. And the thing we love most is it generated almost $7.4 billion in free cash flow. This is the amount of cash left after the company has paid out all operating and capital expenses. It’s the number that doesn’t lie.
As a result, between dividends and share repurchases, it sent roughly $8 billion back to shareholders… more than triple its $2.5 billion in capital expenditure. And the company has been treating shareholders this way for years.
This is a wonderful business. No other words can describe it. And it is dead easy to understand for investors.
Buffett spent about $1 billion on Coke shares in 1988 and 1989. By the end of 1989, the position was equal to 35% of Berkshire Hathaway’s entire equity portfolio. Today, Berkshire’s Coke position has grown to about a 9% stake in the company and has a market value of around $18 billion. And that doesn’t count the massive dividends that Coca-Cola has paid to Berkshire over the years.
The concept is simple to understand.
We look for companies that consistently grow sales, generate huge chunks of free cash flow with high returns on assets, and reward shareholders by way of dividends and share buybacks.
Some growth companies may reinvest part, or all, of their excess cash into growing the business rather than returning it to shareholders. But the important point is that these companies gush free cash flow and don’t require huge capital investments to maintain and grow the business.
For companies like Hershey (HSY), Microsoft (MSFT), or even video-game publisher Activision Blizzard (ATVI) that can achieve this year in and year out, the compounding return for shareholders… and the stock… will be much higher than businesses with similar volumes in sales and profit that require heavy capital investments just to keep the lights on.
Understanding capital efficiency gives you an edge… You’ll be way ahead of almost every investor you know. And if you learn how to buy capital-efficient businesses at the right prices, you will be well on your way to accumulating real wealth through your investments.