Amen of the Week:
“Ideas are commodity. Execution of them is not.”
- Michael Dell, Dell founder
Life is so weird. Consider the absurdities of the just the past couple of weeks ...
One of New York’s top restaurateurs eliminates tipping in his restaurants.
Wal-Mart looks in the mirror and sees its first wrinkle. A younger, prettier Amazon arrives.
Italy sells 2-year bonds at a negative yield. The Financial Times notes that “investors are now paying to lend to a country which has one of the highest debt-to-GDP ratios in the world and has long been a byword for fiscal profligacy.” No retirees take to the streets in protest. No headlines decry the injustice to savers.
These are truly bizarre times. Or are they? The older I’ve gotten, the more I’ve observed striking shifts in popular thinking. I now have a skeptic’s eye toward the “wisdom” of experts and a healthy respect for the preposterous. The once seemingly sensible has often proven absurd, while I’ve seen the seemingly absurd ultimately prove sensible. This is especially true when it comes to investing. That which the smart consensus believes sacrosanct often proves resoundingly wrong. Warren Buffett has not become Warren Buffett by following the crowd.
The reason investing works this way is that if everyone agrees with you, the price of what you’re buying will fully reflect that optimism. It’s not enough to find great businesses run by great people. You have to be sure that you pay a price that is fair (or ideally cheap).
Take Wal-Mart (WMT) for instance. I recall as a young stockbroker in the early 1990s that all my clients wanted to own WMT. It was hard to talk them out of it. Every paper and magazine was gushing over Sam Walton’s unstoppable domination of American retailing. The stock then went sideways for four years. By 1997 you couldn’t talk anyone into buying this “dog”. My clients wanted to sell it. Then grocery happened. Or rather Wal-Mart happened to grocery. The stock went up five-fold within the next few years. Again, the media was abuzz with WMT’s dominance of US retail. Next it would take over the world. Thoughtful academics and analysts wrote of WMT’s impenetrable competitive barriers. Fast forward 15 years to today, and WMT stock has again basically gone sideways.
Now folks fret that it’s the next K-Mart. Maybe so, maybe not. I’ve haven’t researched WMT in many years, so I have no educated view on the company’s future. I only share these comments as a case study in the absurd. Take, for example, the belief that certain businesses are invincible. I have lived long enough to see the invulnerable become vulnerable: AOL, Yahoo, Blockbuster Video, Barnes & Noble, Sony, Fannie Mae and now even Wal-Mart, Coke, McDonalds, and Dell. Vividly I remember once believing that each of these great businesses was invincible.
Wal-Mart is also a lesson in over-paying for a company’s shares – even a great company that has growth prospects to the moon. Paying a high price on current earnings may be justified in a company’s earlier years when it is a small, emerging business. However, by the time a company becomes large and widely-owned, a premium price is just a premium price.
With interest rates at zero and, heaven forbid, heading lower, it is critical to keep our heads straight. First, be mindful that many of the sacrosanct opinions of today – such as interest rates and inflation will stay low forever – may ultimately prove absurdly wrong. Second, keep your eye on the long-term. Owning shares of great businesses is one of the best ways to accumulate long-term wealth. But price matters. Finding fair prices today is tougher than ever with the Fed’s artificial inflation of asset prices. However, there are pockets of reasonable value out there. I’d be happy to help you find them.
Yours in the Field,
Frank Byrd, CFA
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