At the recent annual meeting of the Daily Journal Corporation, Charlie Munger reminded investors that buying shares of a small number of companies at logical prices and holding them for a long period of time is likely to produce far better and more certain investment returns than any other investment approach (while being much more fun too). Applying this businesslike approach necessarily requires an investor to do nothing most of the time because great companies are rarely available at reasonable prices, difficult to find in the first place, and seldom beneficial to sell. Indeed, it is helpful to bear in mind that investing is one of the few human endeavors where one may be well rewarded for doing nothing most of the time. We believe the same concept applies to providing investment information. Investors are drowning in useless information (most of which is marketing materials from those trying to take your hard earned dollars). Although we do not wish to add to the flood and generally refrain from providing articles unless we have timely, actionable information as a tool for wise investors to utilize, we want to share a few observations as we wait for the next perfect investment pitch to cross home plate.
Many are familiar with Warren Buffett's Mr. Market analogy in which he compares the stock market to a schizophrenic business partner. That analogy has never been more apt as the stock market plunged in December and rallied in January. But is it not just the markets that are schizophrenic, it is the market commentators as well. Commentators in late December who predicted further market declines at relatively low market capitalizations quickly changed their tune in January at suddenly higher market valuations. And there is no end to the bizarre ideas touted by market commentators who need to have something to say everyday to get viewers and listeners to tune in. For example, CNBC's Jim Cramer, who last year proclaimed that there were not enough shares to buy, recently recommended selling because future IPOs would result in too many shares. How unbusinesslike. Guessing about future stock price movements is not investing, is not wise, is not likely to result in superior investment returns and is not a lot of fun (at least to us). Rather than wasting energy on such fruitless guesswork, we prefer to spend our time looking at companies and trying to figure out whether they are wonderful and well managed businesses and likely to remain as such, and if so, what they are worth. And then we enjoy writing about those companies.
Mr. Munger also reminded investors that there is no magical formula for selecting stocks. We agree. One must apply logic to the facts (qualitatively and quantitatively) in each circumstance. If the puzzle is too difficult to solve, find an easier puzzle to solve. With some puzzles, the pieces just fit. An example of this may be found in one of the companies Mr. Munger cited in his answer to several questions. Though hindsight is easy, many years ago, Costco's competitive advantages should have been obvious to anyone. The company's best salespeople were its existing customers. Simply ask yourself how many times an existing Costco customer encouraged you to become a member. Think about it for a moment: they were paying a membership fee for the privilege to shop there, they were ecstatic about it and they were enthusiastically recruiting new customers (for free). Costco was offering its customers a compelling value and unique experience that was apparently difficult for other companies to replicate (its two major competitors fell behind). At various times in its history, the strength of Costco's business franchise was not recognized in its stock price. Those of us who purchased then did well. No guessing was required.
We continue to wait and watch for more opportunities to buy shares at the right price in great companies like Costco (and Berkshire Hathaway for that matter). The lower market capitalizations in December briefly offered some good opportunities (such as Facebook, the subject of our December 24th publication). Today's suddenly higher market capitalizations are making it very difficult to find such opportunities. However, we will remain businesslike and not waste time or energy trying to guess about market or stock price movements based on temporary and unpredictable factors. We will instead use this time to continue to evaluate the competitive advantages of companies, seeking to identify just a few with that certain unique something such as the ability to turn its customers into fanatical ambassadors of its brand.
Disclosure: the author owns the stocks mentioned in this article. The author has received no compensation for writing this article.
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