One of the great things about the investment business is it constantly forces you to learn. You have to keep abreast about what is going on all over the world, and in many different industries. The longer you are a market participant, the more you experience situations where you wake up one day and something happened in the world which affected the price of one of your positions. Interestingly enough, what usually builds wealth over time is the consistency and predictability of business performance. When you see revenues and profits marching in a pretty chart that slants upward and to the right, you have found exactly what you want. However, it is not easy to find these companies, and with the advent of new technologies and innovative thinkers all over the planet, markets are the least static they have ever been.
Industries change, and sometimes very quickly, which affects individual enterprises dramatically. For example, if you look at the coal industry today, almost every analyst believes it faces huge challenges competing with natural gas, regulations which make it hard to compete, and issues about scale relative to substitutes. Coal companies have been going out of business for the last year, and still, even today, coal makes up almost 30% of all energy produced. The only constant is change, and it has a dramatic effect on how to view the investment world.
Still, nobody wants to hear about the challenges, what people are interested in is how to succeed. As a result, I believe you have to allocate capital to companies who have management teams who are leaders and not imitators. Imitation not only does not work, it is actually a very sloppy and lazy way to approach business. The risk is immense, when you do not innovate, do not push the envelope, do not think about new products or new ways to be more efficient. A company can now literally disappear in a few years. For example, look at what Apple has done to Microsoft, or what Netflix did to Blockbuster, or Amazon.com has done to Sears or Best Buy. You can also extend this to LinkedIn vs Monster.com, Facebook vs Myspace, or Apple (again) vs Sony or Nokia. So when I see Microsoft and Hewlett Packard attempting to imitate Apple with a new smartphone, I have to think in these instances, they are going to fail, and flame out miserably. Innovation can take many different forms, from new materials being uses, to new processes developed, or a new way of approaching the supply chain. Let me offer a few examples to help illustrate my point.
Having been a shareholder of Starbucks for many, many years, and hopefully for many more, I believe they are an innovative company. I also believe McDonald's is an imitative company. Yes, both have done very well for shareholder's, but if we are talking about taking chances on new products, or new acquisitions, or integrating new concepts into your business methods, it is not even a contest. Starbucks has failed with some of its innovative ideas- like the infamous Chantico (heavy chocolate drink), or an attempt at Italian ices. Still, if you look at their new attempts at buying a juice company to compete in health and wellness (Evolution Fresh), or in tea (buying Teavana), or by buying La Boulange (French Bakery) to help improve their food offerings, Starbucks is thinking, searching, striving for improvement. Some of their new store designs (more mobile for hard locations), the introduction and improvement of the Starbucks card, and the integration and investment in Square, are illustrative of using new methods to become more efficient in all areas. Pushing into new countries like India and Vietnam, show more aggressiveness about growing their business in untapped markets. On the other hand you have McDonald's, which I believes just copies what others try. You have a new smoothie, ok, McDonald's introduces a new smoothie. Got coffee? Ok, McDonald's now has that too. On Wall Street, the investment world worships both Starbucks and McDonald's, but it was not always that way. I think it will be fascinating to see how these two companies perform over the next decade. (Please know in no way am I recommending anyone invest in either or any company- see the disclosure at the end of the blog) Latte or Quarter Pounder?
A company I am not a shareholder of and made a big mistake with is Google, which I believe is as entrepreneurial as any large public business in the world. I just think they try all kinds of different ways of improving and growing their business. They were originally a search engine, and have bought Youtube, and then they purchased Motorola (among others). The development of the Android operating system may yet prove to be Apple's undoing, and certainly poses a huge threat to Microsoft as well. I just read where Google has a trial in Kansas City for fiber into the home for 70 bucks a month. Something like that could displace the telecom and cable companies if it were ever to catch fire on a large scale, maybe five to ten years out. Certainly, a few of their efforts have not paid off, which is the nature of trying new things. Typically, they do not pay off. The important question is if it does work, what is the potential benefit? Fiber in the home could be a 10-50 billion dollar business, so if Google invests $50 million and has a potential winner, they could make 100-1000 times their investment. Innovation makes it possible, whereas the copycat approach is just a way to cover the backside.
The fiscal cliff approaches and our political leadership remains wedded to ideology. More speeches, more tv appearances, more of the same nonsense. The only guaranteed action will be to vote themselves raises and take a vacation. Forward huh?
Square is a very interesting company and will probably be an emerging leader in the payments space-http://techcrunch.com/2012/12/09/square-introduces-gift-cards-the-slow-death-of-physical-credit-cards-and-cash-continues/
Now more than ever, and increasingly so going forward, online personal data becomes a critical area of focus. Here is an interesting approach to this subject-http://www.nytimes.com/2012/12/09/business/company-envisions-vaults-for-personal-data.html?ref=business&_r=0
Is the stock market broken? It looks like the ex-CFO of the NYSE feels it is-http://www.bloomberg.com/news/2012-12-02/stocks-markets-that-flummox-masses-do-no-one-any-good.html
I hope you had a great weekend. In addition, I hope the holiday season is a happy and healthy one for you and your family!!!!
Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.
Here are some articles written about specific companies by Yale Bock at Seeking Alpha-
Disclosure: I am long SBUX.