Most companies aim to create value for investors over the long run, but they are also concerned with beating short-term targets. But there are some excellent businesses that have an extreme long-term focus and are designed to be compounding machines over periods of decades. Here are three in particular that I own in my portfolio that have tremendous wealth-building potential.
A unique real estate play
Howard Hughes Holdings' (HHH 0.72%) management often describes its business as a real-life version of the popular video game Sim City. And this is a pretty accurate comparison for the company's core business of developing city-sized master-planned communities.
The basic idea is that Howard Hughes acquires a large plot of land, like the 37,000 acres it recently bought near Phoenix. It then sells a small portion as building lots to residential homebuilders, which build neighborhoods. These neighborhoods create demand for commercial properties, which Howard Hughes builds and collects rent from. The presence of offices, shops, and other commercial amenities makes the remaining land more attractive (and valuable), so it sells a little more to developers. And this cycle of value creation can take several decades to play out.
Howard Hughes' recent results have been a mixed bag, as the slow real estate market has weighed on sales. However, there is a ton of potential as the real estate market starts to thaw, and the exciting Phoenix-area development is just getting started. Plus, the company plans to spin out its entertainment assets into a separate business later this year, and this includes the fantastic New York Seaport, triple-A Las Vegas Aviators minor league baseball team, and more, and this can be a big help at unlocking value from the business.
Still a great wealth creator
Berkshire Hathaway (BRK.A 0.35%) (BRK.B 0.22%) is perhaps the greatest creator of generational wealth ever in the stock market. From the time Warren Buffett took over as CEO in 1964 through the end of 2023, Berkshire has delivered more than 4,370,000% returns (not a typo).
Of course, it isn't going to do the same over the next 60 years. The numbers have simply become too large for gains like that to be possible. But there's no reason to believe Berkshire can't produce long-term returns that outpace the S&P 500 for decades to come.
The business is designed for long-term growth. It owns over 60 subsidiary companies, including GEICO, Fruit of the Loom, Duracell, and Dairy Queen, just to name a few. It has a massive stock portfolio that has been a massive value creator over the years. And perhaps most significant, Berkshire has over $150 billion in cash, giving it tremendous financial flexibility to take advantage of attractive opportunities as they arise.
A "baby Berkshire" with room to grow
Markel (MKL 1.46%) is often compared to an earlier-stage Berkshire Hathaway, and it's easy to see why. The company's core business is insurance, but it also has a publicly traded stock portfolio just like Berkshire. (Fun fact: Berkshire and Markel own each other's stock.)
Markel also has a venture investing division (Markel Ventures) that invests in promising non-public companies, and with a market capitalization of less than $19 billion -- just over 2% of Berkshire's -- it can invest in smaller companies that wouldn't have meaningful value-creation power for Berkshire.
Buy for the long term
I generally buy all of the stocks in my portfolio with the hope that I'll own them for many years to come, but that's especially the case with these. All three are specifically designed to be long-term compounding machines, and while the businesses will have ups and downs over short periods of time, I'm confident that I could buy these stocks, turn off my computer for 10 years, and return to a significantly higher value at that point.
Matthew Frankel, CFP® has positions in Berkshire Hathaway, Howard Hughes, and Markel Group. The Motley Fool has positions in and recommends Berkshire Hathaway, Howard Hughes, and Markel Group. The Motley Fool has a disclosure policy.
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February 12, 2024 at 06:11PM
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3 Stocks That Could Create Lasting Generational Wealth - The Motley Fool
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