That is what I would name my investment holding company if I owned one. Now you ask (you are subconsciously even if you’re not consciously)… who the hell does this kid think he is talking like he is some authority on the stock market? Well, let me just say that it is absolutely statistical fact that IN GENERAL, the people who wear suits, sit in the offices of banks/brokerage houses/fund companies, and constantly explain to you how qualified they are, consistently (CONSISTENTLY) under-perform the market (as measured by the S&P 500 index). I have an accredited degree in finance and if I leveraged what I learned in earning that degree, I could probably expect similar returns. For the record, only 32% of “fund managers”, “investment advisors”, and “stock brokers” outperform the S&P on any given year. “Well, my broker is certainly in that 32%” you say. Well perhaps. But… only 5% (yes 5), outperform the market over a 3 year period. Hope you chose well.
MYTH: Stock brokers make money by earning high returns
FACT: Stock brokers make money on trade commissions and management fees
So, since essentially all brokers (all the pros as at it were) can’t beat the market, doesn’t it just make sense for the everyday investor to buy an index fund that tracks the overall market to earn the best returns? Possibly… but the markets really aren’t that efficient. There is opportunity to smash market returns by buying the right kinds of assets, hence why a kid from Nebraska (Warren Buffet) has a net worth of over $70 billion while the average “stock broker” has a net worth of like the whopping $3000 equity in his own home in addition to whatever his paycheck was last Friday.
Investing is really about accumulating and growing assets. To stock brokers, it is about trading assets for other assets and skimming a bit off the top of the transaction for spouting off enough to earn a position as the middle man. That all said, let me give you a little quote from the Oracle of Omaha (Mr. Buffet) taken from my most recent Motley Fool Newsletter:
“There’s very little money to be made recommending our [buy-and-hold] investment strategy. Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you’ll rarely see in a monastery, let alone a brokerage house.”
MYTH: To be a successful investor it is necessary to diversify your assets to build a “balanced” portfolio.
FACT: Diversification is a cop out for bad investing.
Diversification kills you when you have made good decisions (because you make less money on those decisions) but saves you when you make bad decisions as you lose less money. Therefore, the reason to diversify is because you are covering your own ass for bad decisions. To continue with this line of reasoning, the better the decisions you are capable of making, the less you should be diversified. Again to quote the Oracle:
“We believe diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing. Many pundits would therefore say our strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it.”
Keeping all of that in mind, I bring up the following points (all developed solely by me):
Lesson 1: Financial statements can be quite hard, even for an accountant, to decipher in terms of determining if a business has been or can be successful over the long term. I have in my life been a part of two highly successful business ventures: one, Loveland’s Orchards ACE Hardware and two, Ernst & Young LLP. The latter does not release financial statements publicly or to its employees. So, in deciding what a successful company looks like on financial statements, I look heavily to the financial statements of my favorite hometown hardware store. You can dissect them eight ways from Sunday, but when you look at what the Oracle calls ‘high intrinsic value’ companies, I tend to find the financial statements of these companies, like the store, follow patterns. Those include low amounts of debt, strong operational cash flows, low fixed costs for its industry, and a large percentage of expenditures toward things that make the business sustainable (payroll, improvements, R&D, etc.). Point being, I think it is difficult to pick up any given set of financials and deem a company potentially successful or otherwise. Compare them to a company you like and are extremely confident in (Orchards ACE for me) and notice the similarities and differences.
Lesson 2: The business is more important than the financials. Remember that our favorite period for holding an investment is basically forever. So, it is critical to decide how attractive the business itself is. When I consider this I look to the principles of making money I have learned from my friend David Neenan. First, does the company have a specific niche it is serving that others have difficulty addressing? Second, does the company/management have the experience necessary to effectively serve that niche? Third, has the company shown the ability to leverage its position as the niche? Fourth, does the company exhibit the ability to use lateral thinking (innovation) to apply this leverage and expand the niche? Those are the key principles of amassing large amounts of wealth I believe and if you have been to Business & You and played the ring toss game you know what I am talking about 
. Also, I like to relate a company’s product/service offering to what we call the “value hierarchy.” A product, in terms of value, migrates up a hierarchy. There are commodities, then products, then services, then an offering that would qualify as an experience, and finally those companies that offer some thing transformational. Orchards ACE Hardware sells products but takes the step in value to offer a service by providing convenience and knowledge on product use. What makes Orchards ACE Hardware more successful than most is that we are pushing the boundary of becoming an experience… a place customers go because they enjoy the shopping experience where someone knows them, the product is different and exciting, etc. If you buy ownership in businesses that offer experiences or opportunity for transformation to their customers, you WILL earn consistently above average returns.
Lesson 3: If the business is fantastic and the financials aren’t a deal breaker the third dimension of insight is the quality of management. My favorite indicators of this are management’s background and the share they hold in the company. It is clear to me that companies who are still in position where the founder, the president that took the company public, or a related party (such as a son or long-time partner) is leading the company profoundly outperform companies where this is the not the case. I think these companies are heavily emotionally invested in the success of the organization and have a grander vision for the organization than “maximizing shareholder value” (which I think is a totally bullshit and misleading vision to operate an organization on). Founders tend to think they are out to dramatically improve the lives of their customers and employees, as well as the community within which they operate. Progressions towards those goals are what actually maximize organization value (we are always looking to invest companies increasing value, not increasing monetary worth). Founders and their related parties concentrate on making their company the best it can be rather beating themselves up trying to compete with others. Examples of companies operated by their founders or related individuals include Wal-Mart, Berkshire Hathaway, Starbucks, Microsoft, Google, etc. Lots fail also but name five other companies as successful as these. Now, if the organization has heavily emotionally invested management, I like to see them back that up by being heavily financially invested. The Waltons still own over 30% Wal-Mart, which is the most valuable company on the planet most days. Insider holdings amounting to a large percentage of the company’s stock, particularly when they are holding as opposed to selling, is a great sign that the company is positioned to provide long-term value.
And… that’s it if you ask me. This seems extremely simple but it is amazing how few companies I have found that fill these criteria. With that I say drum roll please as I bring you my list of current holds and watches… IN MY NEXT BLOG POST!
Finally and by far the most important – I DON’T KNOW NOTHIN’!! “All learning begins with a declaration of ignorance.” to again quote David Neenan. No matter what my investments, I am going to learn from the mistakes I make, which will make me a better investor in the future. That is the most powerful and impactful thing I find this all can have your life is that it teaches that the key is to have the courage to fail and to learn from your mistakes (although my 60% return to this point is nice). Remember the Oracle: “Be greedy when others are fearful and be fearful when others are greedy.”
. I am visiting yet another midwest (or maybe south?) hospital for work and am not impressed with the home of our most recent ex-president. Good thing is that it is one my state off my list which leaves only nine states I have never been to. Yep, 41 down and the following nine to go:
. Otherwise, check out a few and ignore those that appear uninteresting. Just for referrence, they all came from Germany, Slovenia, Austria, Slovakia, Hungary, the Czech Republic, Poland, and exactly one from Croatia (taken to prove I was there after accidentally sleeping through my stop on the train and ending up in the wrong country), HAHA.
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