If you had to choose a single company to invest all your wealth in for the rest of your life (and potentially for the next generation), which one would it be? And as a playful addition: you are allowed to use dividends or similar returns however you see fit, but the principal wealth must remain in this one single company.
This is, of course, a highly hypothetical thought experiment, as in the real world, it pays to take advantage of the “free lunch” provided by diversification. However, the thought experiment is a useful tool because it forces one to distinguish companies that create value and possess genuinely sustainable competitive advantages from ordinary companies.
An analogy would be an old-time industrialist (patruuna) whose wealth is tied to a single business, upon which a dynasty is built. An excellent real-life example of this is the Herlin family and Kone. Of course, Kone hasn’t always been a “dynasty company”; it evolved into one under the leadership of several generations, but it has held that status for several decades and likely will continue to do so. Another obvious example would be Sweden’s Investor, but there, diversification is already built into the structure, which in a way cheats the main point of this thought experiment. A counter-example would be biotechnology companies, where the outcome decades from now is more or less binary, which is why one wouldn’t want to tie all their wealth to them.
Additionally, it should be noted that in real life, the price/valuation at the time of purchase enormously dictates total returns and risks, so let’s try to set valuation issues aside for this discussion.
My own criteria for choosing my “one and only” stock:
- The company operates in a value chain that satisfies a fundamental human or societal need. This means demand for a similar solution should still exist decades from now.
- The company is a critical player in the aforementioned value chain, giving it strong pricing power within that chain.
- The industry has moderate capital requirements. This means, for example, physical production, as this creates a barrier against the threat of competition from smaller players. A potential new challenger would have to invest quite massively to compete even at a basic level.
- The industry must not be extremely capital-intensive. This partially contradicts the third point, and these two criteria must balance each other. The industry must by no means require chronic, giant investments in capacity or simply to maintain competitiveness. Working capital requirements should also be relatively low. The risk of needing additional capital injections should be minimized.
- The industry or competitive environment should not be among the world’s largest, but rather of a suitable size. It should also not be at the epicenter of current technological development. Overly flashy margins and volumes attract massive amounts of capital into the competition. Massive amounts of capital and accelerating technological development can overturn a competitive position in a surprisingly short time, causing my company to lose its position over the decades.
Nokia’s mobile phones are an excellent example of this. In the early 2000s, it had global market leadership in the consumer market, technological leadership in the most central industry of the time, and absolutely massive volumes. However, it was precisely those huge volumes and margins that made the market so attractive that Apple entered from completely outside the industry, initially trying to win only a small share of the total market. But it turned out that the iPhone didn’t just take a slice of the existing pie; it reshaped the entire industry. A whole new ecosystem was born with app stores and services, and eventually, Apple grew into the largest and most prominent player in the redefined field. Currently, something similar could be seen in microchips related to AI. Margins are brilliant and volumes are huge, which means that, to put it bluntly, every top expert, venture capitalist, and even many nations are concentrating their resources on the field to compete for a piece of the cake. It is very difficult to say what the industry and its players will look like in tens of years. As a sort of opposite example, one could highlight Valmet and Andritz. It doesn’t make sense for anyone outside the industry to start using massive amounts of resources to compete with the specialized experts already operating there. The markets are large enough to generate returns, but small enough that endless capital doesn’t find its way there. Competition happens between existing players, and even industry innovations are born from within. This doesn’t mean Valmet or Andritz will necessarily perform better for their owners over the coming decades than many microchip manufacturers, but the risks are indeed different.
In my own reflection, several Swedish engineering firms, Linde, and (as a slightly different option) Ferrari emerged as the most attractive choices. Among the Swedish engineering firms, the most prominent are Alfa Laval, Sandvik, and Atlas Copco. Similar types of British companies like Rotork and Spirax-Sarco would also be interesting. My choice might be Sandvik if I believed that the cyclicality would disappear from the mining industry along with solutions related to climate change. However, that probably won’t be the case, and I suppose at some point we’ll have to start manufacturing equipment for Mars, which raises its own questions about the boundaries of the business. Another choice I’ve pondered a lot is Alfa Laval, as food production, water treatment, and the pharmaceutical industry will need Alfa Laval’s solutions in the future too. However, solutions related to fossil energy production will certainly wither away over time, which complicates the choice considerably. Granted, those solutions will still be utilized for a couple of decades, as the energy transition will take time. The company thus has plenty of time to adapt, and in real-life investing, this wouldn’t cause major concern. Most physical processes are so deeply rooted in industrial structures that no fundamental change is foreseeable in water treatment or food industry processes, for example. The phase-out of fossil energy is, however, a very fundamental change over the decades and naturally creates a small risk for a choice made “for eternity.” Atlas Copco would also be very tempting, and I could just as well end up with it. Perhaps my choice, however, is something like Alfa Laval but without the aforementioned concern—namely, Spirax-Sarco. Steam will be used in physical production regardless of energy sources, and furthermore, their customers operate in sectors that are fundamentally important to people and society. In addition to the equipment, the customer pays for service and process optimization, so switching costs are significant. Spirax’s value proposition is critical to the customer but marginal in cost within the overall operation, which means strong pricing power in the value chain. Perhaps my choice for my only stock would therefore be Spirax-Sarco, if the stock’s valuation didn’t throw a wrench in the works. Surely Atlas Copco would also be a great temptation if valuation weren’t messing with the mind of a price-conscious investor. Fortunately, such a difficult choice doesn’t have to be made in real life.
