After a 921% return in 13 years, Nick Sleep closed his investment fund in 2014 and announced his plan to focus on just three stocks. These were Amazon, Berkshire Hathaway, and CostCo.
All three have been outstanding investments over the last 10 years. The reason for this is they all have competitive advantages that make them extremely difficult to disrupt.
I think that’s a winning formula for investors. And while I’m not going to risk my entire net worth on just three businesses, I’d look for something similar if I had to do something like this.
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Diageo
Top of my list would be Diageo (LSE:DGE). The business has a leading position in a growing industry and I think its scale is going to make it very difficult to disrupt.
The most vulnerable part of the firm’s portfolio might be gin. Barriers to entry are low and the likes of Brad Pitt, James May, and Ozzy Osbourne have all launched products in recent years.
Diageo however, can buy smaller brands before they become major threats. In doing so it adds value by expanding their distribution – as it did in 2020 with the gin created by Ryan Reynolds.
The competitive risk is real, but the barriers to achieving Diageo’s scale are high. That’s why it’s one of the stocks I’d buy if I was only able to choose three stocks to buy going forward.
Disney
Disney‘s (NYSE:DIS) something of a business in transition. But I think the company’s assets are second to none and there are clear reasons for investors to be positive about the future.
Most obviously, the firm’s direct-to-consumer division has started turning a profit earlier than expected. The shift to streaming has been bumpy, but the most recent results are encouraging.
Disney’s found itself involved in political controversy over the last few years. I don’t like this at all and see the possibility of it continuing as one of the main threats to the company’s brand.
Nonetheless, the business keeps doing well at the box office and its strong franchises put it in an exceptionally powerful position. That’s why I’d choose the stock as one of my top three.
JD Wetherspoon
Nick Sleep identified CostCo because of its relentless focus on customer value. This has been a powerful force for investors and I think JD Wetherspoon (LSE:JDW) has something similar.
Maintaining this is likely to be challenging. Increases in the National Living Wage are likely to mean the firm has to work hard to stay profitable without undermining its offer to customers.
Nonetheless, I think Wetherspoon’s has a genuine advantage over its rivals. Unlike its rivals, when the government reduced VAT during Covid-19, the business cut prices to pass this on.
That should give the firm some headroom to raise prices while remaining significantly cheaper than its rivals. And that’s a competitive position I’d be willing to bet on.
Investing in quality
Diageo, Disney, and JD Wetherspoon all have a place in my portfolio. And if I could only buy three stocks, they’re the ones I’d choose.
All three have competitive advantages that I think give them strong long-term prospects. From my perspective, that’s what matters most when it comes to finding companies to invest in.
