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Monday, September 9, 2013
Today, we will break confidences in a way...
I will tell you about a private discussion I had with a very wealthy man, who… perhaps like you… has long struggled with his personal portfolio. He now faces even tougher decisions about how to allocate capital for his business.
Out of all the things I've written about over the years, I think you'll find this discussion might hold the greatest value... if, that is... you're willing to think carefully about this private discussion.
The message at the heart of today's essay addresses the very foundation of successful investing... In my experience, the ability to comprehend and internalize the ideas below will be limited to people who have owned or operated their own business. Very few others have grasped their significance.
I hope you will be among the few who do.
I believe understanding – from the beginning – that the strategy we're discussing below is most suitable for business owners may, in fact, be the key to understanding it for everyone.
The story starts this way...
Several years ago, a close friend, who is the CEO of a major global business, asked me to help him with his personal portfolio. Normally, I'd never even agree to a meeting where I thought the subject would come up. Most people assume, wrongly, that I know something more about securities or investment opportunities that I don't include in my newsletter. But I don't. I write up all of the best ideas I discover.
And that is exactly what I told my friend. Besides, I knew he really didn't need my newsletter. "There's no secret to investment success," I told him. "As the leader of a big, global business, you've done dozens of very successful acquisitions. You know exactly what creates business success. And you know the appropriate price to pay for private companies. Just apply the exact same care to your personal investment decisions."
Two weeks ago, I saw my friend for the first time in a long while. We were talking about investments again. But this time, we were talking about how he manages his company's tremendous cash flows. He explained that he'd hired a "professional" money-management group.
I asked the logical question: "How's that working for you?" But I knew the answer before I asked – "Terribly."
My friend believes that investment professionals – who do not have day-to-day responsibility for operating a business – will prove to have better business judgment than a long-term CEO who has successfully managed dozens of acquisitions and grown his business from $75 million in market cap to more than $1 billion.
My friend has world-class business judgment. He developed it by making decisions every day about marketing, product development, personnel, policies, branding, real estate, partnerships, lawsuits, and insurance... decisions with millions of dollars at stake.
To believe that a money manager, whose chief source of business insight is probably Barron's magazine, is going to prove more successful as an investor is like believing the local putt-putt champion will beat Tiger Woods in a driving contest.
Yes, I know... a select few money managers have outstanding, world-class business judgment – like Carl Icahn, for example. But you can count these money managers on two hands. And investing with them is extremely expensive.
In other words... whether my friend likes it or not... he's likely to be far better off managing his company's excess capital personally than he is entrusting it to a "professional."
The same is likely true for you, if you have any significant business experience. That experience is your greatest advantage in the markets.
In the mid-1970s, an investor with tremendous business experience, Warren Buffett, became the business "coach" and confidant of the Washington Post's Katharine Graham. Graham became chairman and CEO of the newspaper company unexpectedly when her husband committed suicide. She leaned heavily on Buffett's business judgment – especially when it came to the question of how to manage the business fund. Buffett addressed that critical question in a private letter to Graham.
Fortunately... I was sent a copy of that letter late last month. Here's what Buffett told one of his closest friends about how to manage her company's pension account…
This approach... to buy individual stocks in the same way you'd buy whole business operations and to ignore whatever sentiment is prevalent in the stock market... turns out to be both the most profitable way to invest (because of the focus on long-term results and appropriate purchase price) and the safest.
Use your hard-won business judgment. Don't buy a single share of stock in any company you wouldn't want to own forever. Don't judge the investment's success or failure by its share price, but instead by its business results. Don't allow popular sentiment to sway you from your course. Instead, use the wild, irrational swings in average share prices to give you opportunities to both buy at great discounts and sell at unwarranted premiums.
As Buffett himself says, thanks to the impersonal nature of the market, you can take advantage of "unwitting buyers" without any stigma.
Few business people invest in the stock market as they would in their own industry. It's easier to simply wire the money somewhere else... and make it someone else's problem. But if you're an experienced business person, you're not likely to solve your investment challenge by going to "professional" investors. Your business judgment will almost surely be more sophisticated than theirs.
"In simple terms, a share of stock represents a share of an actual business," Dan Ferris says. "The overwhelming majority of investors would make a lot more money – and lose a lot less – if they learned to approach stocks the way they'd approach ownership in a business." And the first step is as simple as changing your thinking. Get all the details here.
So how do you find a company you wouldn't mind holding forever? Dan says "great businesses can be defined a number of ways, but most of them share a few common traits... one of the most important traits is what's known as a durable competitive advantage." Learn more about durable competitive advantage – and the other traits great businesses have – in this interview with Dan.
NEW HIGHS OF NOTE LAST WEEK
E*Trade Financial (ETFC)… brokerage firm
Cigna (CI)… insurance
Humana (HUM)… insurance
UnitedHealth Group (UNH)… health care
iShares Nasdaq Biotechnology Fund (IBB)… biotech stocks
ConocoPhillips (COP)… Big Oil
Kodiak Oil and Gas (KOG)… oil and gas
Halliburton (HAL)… oil services
Tesco (TESO)… oil services
Facebook (FB)… social networking
Salesforce (CRM)... business software
Lions Gate Entertainment (LGF)… movie studio
Netflix (NFLX)… movie rentals
Dish Network (DISH)… satellite television
Market Vectors Gaming Fund (BJK)… casinos
MGM Resorts (MGM)… casinos
Best Buy (BBY)… electronics retailer
Dollar General (DG)… discount retailer
Constellation Brands (STZ)... booze
CarMax (KMX)… used cars
Harley-Davidson (HOG)… motorcycles
Goodyear Tire (GT)… tires
Zale (ZLC)... jewelry
Under Armour (UA)… "sporting" products
NEW LOWS OF NOTE LAST WEEK
iShares Home Construction Fund (ITB)… homebuilders
Stanley Furniture (STLY)… furniture
Strayer Education (STRA)… secondary education
Simon Property Group (SPG)… shopping malls
Aeropostale (ARO)… clothing
American Eagle (AEO)… clothing
In The Daily Crux