Chillin

Mostly my blog is a way for me to follow my curiosities by studying interesting events, companies and investments from the past. I thought I’d experiment with writing about a live situation instead of doing that. This isn’t meant in any way to be a recommendation of what to buy but rather a way for me to record what I think, share some thoughts on investing and come back to it in 3 to 5 years and see how it played out. 

As compared to the last few years, the prospects for investing in public equities have improved a tad. I won’t say this is any kind of bargain hunter’s nirvana, but I feel the same way that Buffett felt about his utilities business, this market has enough things to do to stay real rich, though not necessarily easy ways to get real rich. 

It’s more fun to give examples than speak generally so some names below show what I mean.

These companies are unquestionably the leaders in the industries in which they operate, are generally run reasonably and have acceptable capital allocation policies. They all trade at (my estimates) of low teens to high teens multiples of free cash flow. I expect them all to make more money 10 years from now. 

• Home Depot - Transaction volumes are heading back to normalized pre-pandemic levels and average ticket is not grotesquely above pre-pandemic real rates of growth

• Henry Schein - mid 30s% market share dental distribution and ~25% market share in alternative medical distribution

• Domino’s Pizza UK - Roughly half of the UK pizza market, roughly half of orders are made by customers that have the app installed on their phone and order through the app, history of system sales growth

• American Express - Globally recognized, recurring use consumer brand that is marginally a Veblen good

• Lamar Advertising - small and middle market billboard operator (LAMR on a recent acquisition - “very typical Lamar, dominate middle markets, places like South Bend and Fort Wayne and Lafayette, Indiana, little places like that where you just own all the billboards”)

• Raytheon - Manufacturer of jet engines and missiles, along with a myriad of other socially useful products.

Individually, I don’t think these companies are very complicated or difficult to understand. Undoubtedly there will be companies that will not do well but as a group, I don’t think their prospects, at current prices, are likely to disappoint you if your goal is to stay real rich. 

One of the challenges of a very expensive market is that investors start to push at the edges of what they think may work for them on an individual level but is extremely unlikely to work on a group level. Nine out of ten times buying the highest multiple thing that is over-growing or the lowest multiple thing that is over-earning doesn’t work, but in a heady market we start to slowly but surely shift our standards and latch on to individual situations that might work for us, because we “did the work”.

I’m convinced a big part of why we do this is just that it is more exciting. Doing what is likely to work out fine most of the time can be intolerably boring. 

In my experience, albeit a low sample size, investors that repeatedly try to be overly creative may hit a home-run once in a while but eventually end up giving most of it back. By overly creative I mean investing in novel business models, paying valuation multiples outside the bounds of what is statistically likely to work over a long time and a large sample size, believing in overly slick CEOs, and looking for aggressive leverage structures to amplify returns. 

I read recently from another investor that Buffett’s super-power is his keen and unmatched sense of risk and reward. The source of this is his unmatched patience and his consistency in avoiding the creative forms of investment listed above due to his lack of greed or peer envy. Buffett in his “modern era” has not really put lots of money to work at low or high prices or gotten involved in very novel or exciting situations. It has mostly been intolerably boring. Now some budding savants will say wait a second, that’s not how he got real rich, he was doing merger arbitrage and net-nets and going activist on little windmill companies. Brother, I don’t have the IQ for that, and I wish you the best in following that path and reading about you soon in the papers alongside the greats. 

Some past examples of a specific kind of intolerably boring investing follow.

Apple from 2017 to Q4 2019 or Wabtec over the last few years. Apple’s dominance is pretty self-explanatory with its iOS / iPhone ecosystem. Wabtec locomotives move 80% of the rail freight in North America. 

These are undeniably dominant hardware companies but their valuations were modest for quite some time due to fears of growth. In Apple’s case, the smartphone market was completely saturated and sales cycles were lengthening, leading to a declining new phone market. There were also two worries about China. Sales in China, which is a huge market for Apple, were on the decline after 2015 and the fear was that WeChat was the dominant operating system in China and Chinese customers had much less loyalty to iOS, especially as local manufacturers of Android based smartphones were moving up the technology curve and starting to churn out some very technically advanced devices. Later on, trade war issues in the headlines came to affect sentiment about Apple as well. 

In the case of Wabtec, there had been a loss of enthusiasm for the business after years of multiple headwinds: PSR driven cutbacks at the railroads, declining commodities prices, run-off of the one-time benefit of Positive Train Control mandates from the government, topped off by a horrible 2020 due to COVID related capex cutbacks. 

The quintessential investment of a similar thesis that is imprinted onto my mind is the 2010 VIC write-up on Lockheed-Martin by user sag301. “High uncertainty, low risk”

After the GFC and the subsequent focus on government debt and deficits (and the wind-down of Iraq/Afghanistan), the feeling was that it was a very high probability that defense spending would not grow for a very long time. Which ended up being about right. But Lockheed at 9x FCF still ended up performing very well for investors. Like Apple, a modest starting valuation and a disciplined capital allocation process at Lockheed was a big contributor to the favorable end result.

Of course, for every outcome such as this, there’s IBM. Another dominant, hard to replace company at a modest valuation. Almost out of nowhere (from the POV of most generalists), the cloud phenomenon completely changed their trajectory. It ended up being a slowly melting ice cube. There was no change in the relevance of the smartphone or the for-profit defense primes whereas IBM’s on-prem outsourcing and mainframe businesses, despite being very long-tailed annuities, went into slow but sure terminal decline. Despite that, it was mostly a break-even investment for BRK as dividends and buybacks canceled out slow earnings declines and multiple compression.

I personally have gotten in trouble partnering with investment banker types and management consultant types running companies who approach everything in life by working even harder and optimizing even further. It’s been kind of a shock to me to see humongous consumer staples businesses selling alcoholic beverages and packaged foods severely wounded by such managers. 

I guess, one thing I’m questioning personally is whether pushing too hard on everything is wise. 

Unfortunately, I fear no one wants to get rich slowly. The irony is that it only feels slow. Why are we in a rush?