Last week I visited the headquarters of a local real estate company that owns, manages, and develops apartment buildings. The company, which shall remain anonymous, operates about 70 apartment buildings in the western part of the United States. It has over 400 employees, and in the past year, it bought over a billion dollars in real estate.
The founder's focus in the early days was to buy distressed properties from banks. And from that humble beginning in the 1990s, with grit and tenacity, he grew the company to be one of the most respected apartment operators in California.
This essay is inspired by my conversation with him. Where I learned how much business has to teach us.
A good business does not make for a good investment necessarily. Last week, I attended a webinar where one of the speakers explained that Coca Cola is a "compounder stock." By that, he meant that whether you bought the stock in the 1980s, the 1990s, or in the current decade, you would get a good return.
Really? As a careful student of finance, I looked at what Coca Cola was trading for between 1997 and 1999. It was easy to see that you would have to wait for about a decade until you saw the price of the stock return to your cost basis. I don't know many investors who have that kind of patience.
Consider Salesforce.com (CRM on Nyse). At $163 per share, this cloud-based software company is trading at over 90 times the earnings. And a quick review of their website tells you why investors willing to pay the hefty multiple. Salesforce focuses on software design, big data analysis, and artificial intelligence. Choose any path for a career, and you likely do well.
The inverse logic works just as well. You should probably avoid low p/e industries. For example, both Noble Energy (NBL on Nasdaq) and Murphy Oil Corporation (MUR on Nyse) are trading at less than five times the trailing earnings. (So, why bother with a profession when you know you will compete on positions with experienced candidates?)
Consider Nvidia Corporation (NVDA on Nasdaq) as an illustration of the nonlinearity concept. Between 1999 and 2016, investors in Nvidia saw a rate of return of about 8% . But investors who bought Nvidia in 2016 saw a rate of return of 52%, a fourfold increase. (Nvidia now trades at $238.)
Similarly, life is not linear. There are times when we feel stuck and lack vision for the future. And at such times, going over the historical record of companies such as Nvidia, which shows an overnight success (that took the company to achieve over a long period) I find to be to alleviate the mood.
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In Brave Companions, the historian David McCullough tells that the time former president Teddy Roosevelt spent in Medora, a little town in the Badlands of North Dakota, had a profound effect on the former president's life. Similarly, I believe that just one or two stocks will have a profound effect on your life.
Take Amazon, for example. If you bought $10,000 worth of shares a decade ago, the value of the position would today be 33 times higher, $330,000. If you had placed the same amount of money 20 years ago, you would earn 100 times your money. The value of your Amazon position would be a million dollars.
By studying the stock market, you read and experience fear, greed, euphoria, , and times of immediate and unexpected duress .
Not only will you learn about the psychology of other investors, but you will also better understand your psyche.
My parents visit Paris each year and marvel at the ingenuity of the Impressionist era. And how can we not marvel at the wonders of business.
Want to study the art of business? Just read about the annual report by MasterCard, Maotai, Markel Insurance, and Moody's.
Many find inspiration in the words of Shakespeare and Henry James. And to me, annual reports can be a form of literature. I love reading annual reports by Carriage Services (which I bought last year), Jamie Dimon at JP Morgan, and Warren Buffett at Berkshire Hathaway.
Stock research is also an opportunity to explore the world. A friend of mine looks for companies outside the United States that share a similar business model to successful, U.S-based companies. So, for example, she will look for Indian-equivalent Moody's. Or the South-Korean equivalent of a stock exchange such as the New York Stock exchange.
Last month I bought a few shares in Micron (I will publish the investment idea in the upcoming weeks (write to me if you would like to be notified when I post the investment idea). And I quickly realized that geopolitical tensions resulted in a 10% loss in revenue.
Where the business will be in ten years is one of the first questions I ask before buying a business. For example, it is reasonable to assume that in ten years, we will keep chewing gum (say, Wrigley's) and that we will drink soup in the winter (say, Campbell's). So it is reasonable to project ten-year cash flow and to compare the net present value to the current price. But who can predict where our payment system will be in ten years?
So when you buy a stock with a long term outlook, you tend to ignore daily market movements. And thinking over the long term requires you to focus on the business fundamentals, whether management is capable and invested in the business. And whether the industry is growing. In short, the stock market also teaches us to focus on what matters.