It is a rare and admirable characteristic for an individual to consistently improve over many years. Consistent improvement over many years requires a combination of discipline, vision, adaptability, teachability, resolve, and creativity.
Similarly, a company that consistently improves its financial performance over many years is a rare elephant. These companies should be enshrined in the Business World “Hall of Fame”. Unlike athletes, “Business Hall of Famers” can get better with old age, as they leverage advantages from an older era into a newer era. For the serious long-term buy-and-hold investor, identifying and studying these types of companies is a worthwhile endeavor.
Here is the simple question to frame a complex topic: which of the 500 companies currently in the S&P 500 has most consistently improved over the past 30 years? Which of these companies will continue to be great companies in the long-term future? That’s a great place to start. But since great companies are priced for continued greatness, there is a second important follow-up question: which of these rare elephants are priced attractively enough to consider for long-term investment?
Limiting our focus to the S&P 500 is an arbitrary limitation that emphasizes large market capitalization names (and exclude some smaller high-growth companies). But it is a worthwhile goal is to simplify a complex topic. Everyone knows the S&P 500. In the future, we have plenty of room to explore other avenues of analysis.
Rocky Inhospitable Niche
Most investors focus on understanding short-term results, e.g. how will the stock perform in the next 3 months. Professional money managers seek to gain an edge by discovering some secret piece of information that will impact the stock in the future. This emphasis on short-term results and/or emphasis on access to secret information means that there is an opportunity if we avoid this way of thinking.
Almost no one talks about the 10 years history of a company’s fundamentals, how this might reveal the true business philosophy of the management team. My opinion is that understanding the true business philosophy of the CEO and management is the best indicator of the future 10 years. Discussing 10 year, 20 year, and 30 year historical trend in fundamentals seems like a fools errand. And yet I will retreat to this rocky, inhospitable niche to avoid the crowd (using imagery from The Dao of Capital by Mark Spitznagel).
As a somewhat unrelated side-note: the work of Ben Thompson at Stratechery inspires great admiration, and is worthy of style emulation in the realm of investment strategy. I am a very satisfied customer and grateful subscriber to his newsletter on technology strategy. His work has been an inspiration to me. This blog is my attempt to model his excellence.
Investing by Selecting a Business Partner
One way to think of public company investing is to imagine that you are selecting a business partner for an important business venture. (After all, what could be a more important business venture than being entrusted with your hard-earned savings/capital?) One way to select a business partner might be interview them in-person, and ask for references, to see if you trust them. I would want to examine prior actions, to test if this individual acted in the best interests of his business partners, or out of self-interest (known as the “agency problem”). I would want to look at the long-term results (since short-term results can be easily manipulated by a bad business partner).
On the other hand, some very successful investors prefer to intensely study latest news and/or the annual reports of companies, looking for some special hidden insight buried in the footnotes of a particular year’s report. I am somewhat skeptical of this approach if the goal is to to evaluate the long-term historical financial results (for example 10 years) for a large group of companies (for example 500 companies). One would have to read 10 years of annual reports to understand a single company. In order to have an opinion of the 10 year performance of 500 companies, one must read 5,000 annual reports. That is a difficult road to travel. This road becomes 3x more difficult if the goal is to understand the 30 year history of these companies (15,000 annual reports). Perhaps this is probably why most investors and analysts specialize by industry sector.
Telephone Directories Stapled Together
Is this even possible? Is it possible to have an informed decision about public companies by simply looking at the financials, without a detailed qualitative assessment of the company. This approach is favored by none other than The Oracle of Omaha, as described in this article (referencing Alice Schroeder’s book).
Still struggling with too much cash on his hands and no attractive stocks in the U.S., Buffett was looking for a market that was overlooked and undervalued. He found it in Korea. According to “Snowball,” his biography by Alice Shroeder, one day in 2004, he got a book the size of several telephone directories stapled together. Its pages contained lists of Korea stocks. Buffett sifted through these pages in the old fashioned way, just as he went through Moody’s manual in his 20s. He narrowed the list to a workable number and studied more until finally, he arrived at a much shorter list which could fit on one page of legal-size paper. He said:
“It’s like finding a new girl to me… These are good companies, and yet they’re cheap. The stocks have gotten cheaper than five years ago, yet the businesses are more valuable. Half of the companies have names that sound like a porno movie. They make basic products, like steel and cement and flour and electricity, which people will still be buying in ten years… Here’s another one, a dairy. I could end up with nothing but a bunch of Korean securities in my personal portfolio.”
Regarding risk, he said:
“Now, I’m no expert on foreign currencies. But I’m comfortable owning these securities denominated in the Won right now… When you invest, you have to take some risk. The future is always uncertain. I think a group of these stocks will do very well for several years. Some of them may not do well, but as a group, they should do very well. I could end up owning them for several years.”
In 2006 Buffett spent $768 million and bought 5.1% of Posco (NYSE:PKX), the Korean steel maker, and he still owns this position. His profit on this position is 70%. Regarding Posco, Buffett said, “It’s a great company. And great companies get worth more and more all the time.”
“How Warren Buffett Made Money with Foreign Stocks” by Jimmy Xiao (gurujx on GuruFocus.com)
In October 2007, right at the recent peak of the stock market, Buffett visited Korea and said that the Korean market was modestly cheaper than most markets around the world. He said, “…but I am just looking at price earnings ratios, and you have a flourishing economy here with 50 plus million people that seem to be working very hard. So I would think that the Korean market would do as well over the next 10 years … not 10 weeks, 10 months … but 10 years, as most markets, and perhaps a little better.”
Not a Traditional Newsletter
So how will this work? Here’s how I would like to organize things. Each month I will publish a free article that highlights an S&P 500 company that I like … this is an exploration in how to evaluate public companies as if business partners managing your capital (rather than thinking about companies as “stock picks”). Great companies are difficult to find and worthy of extended analysis. Writing about 12 worthy S&P 500 companies per year is an ambitious goal, but I believe it is possible. (My analysis approach is informed by these amazing two books, among others.) These monthly articles will be free content available on the website. No account creation or payment necessary.
In addition, I will publish weekly articles only available as private content to premium subscribers. The premium membership will be priced at $40 per month (or discounted as $400 per year). Private content to premium subscribers will also be available for delivery via email. Some topics I look forward to exploring in the private weekly articles:
Some topics I look forward to exploring in the private weekly articles:
- Detailed complex discussion of the monthly article companies
- Top holders (investors) of monthly article companies
- Navigating short-term and long-term business cycles
- Thinking through interest rates, yield curve, credit spreads as a backdrop to investing
- New technology adoption as a function of monetary policy
- Parochialism and regional mindsets: avoiding blind-spots
- Software, data, automation, and AI: impact on employment skills re-tooling
- The culture and personality of a programming language ecosystem
- Black swans, long/short gamma, and tail-hedging portfolio allocations
- Differences in early-cycle, mid-cycle, late-cycle investing
- Thriving as a public-company employee during recessions
- Preparing and re-tooling for the jobs of tomorrow
- Disruptions to the traditional education infrastructure
- Opinionated fear of fashion, financials, pharma investing
- Thinking through late-cycle investing, and how to view unprofitable companies
- When buybacks (and M&A) create vs. destroy shareholder value
- How accelerated depreciation and deferred taxes create shareholder value
- Comparing dividend-payers vs. non-dividend-payers on an equal-playing-field
- Getting to par: the mindset for transforming from consumer to investor
On second thought … some of these topics are so useful, I might include a few of them in the free monthly articles. But the intent is to have two different audiences: free content on a monthly basis for a broader audience, paid content on a weekly basis for a premium subscriber audience. This approach is similar to Stratechery (weekly free articles, daily paid articles), although with a different subject area, and slower cadence. As of now, this blog is a side project (i.e. I continue to have a full-time job), but if this ever becomes a full-time endeavor I will revisit the frequency and breadth of content.
An appreciative thanks goes to Cyntia, a talented graduate of the UC-Irvine Data Analytics Bootcamp, who helped with the setup of this blog. A very special thanks to my friend Jon, a curious mind and creative investor, also was one of the first people who ever paid attention to my opinions on investing. Jon and I both learned a lot from each other. Thank you Crocker for being a wonderful finance professor, excellent teacher, and nice person! And a heartfelt thanks to my friend Arvind, a constant source of encouragement and advice, who was also the first person to push me to read The Second Machine Age written by Erik Brynjolfsson and Andrew McAfee (giving me a sense of urgency to re-tool my skills).