So much of successful investing comes from knowing what you are looking for and then having the discipline to stay the course. Although this sounds simple enough, human nature, greed or envy often enters the picture challenging your sanity. Warren Buffett has often counseled that “unlike Olympic gymnastics, in investing there are no extra points for an increased level of difficulty—so keep it as simple as possible.”
This has worked well for Buffett over his seventy-year investing career as he has emphasized predictable and consistent businesses. Buffett has added that if a business is not predictable and consistent, then how can one logically assess the future and, in the process, assign a reasonable value to any company?
If the value of a business is the total stream of cash produced, it is incredibly difficult to value a business if you have little idea where that business will be in 10, 5, or even 3 years. As such, the less predictable, the higher the risk factor for any investment.
This is a major reason why Buffett has favored boring businesses with extremely long-time frames—like Dairy Queen, Coca-Cola, Kraft and Heinz.
Unfortunately, this common-sense approach is hard to implement when the latest gadget or tech maker is shooting through the roof.
Two years ago we penned an article cautioning about the much-hyped action camera maker, GoPro. After that, we looked foolish as the camera maker jumped 50% in two months. Similarly, last year one could not turn on the financial news without a triumphant update on Apple or Netflix. They soared while most languished.
The temptations to chase these are great.
However, over the past two years GoPro has sunk by nearly 85%, giving up all of its early gains and then some. A year ago both Apple and Netflix were 30% higher proving there was far more risk than met the eye.
Therein lies the danger of investing in things that are predicated upon cool factor, new tech or the latest fad—they can change quickly. Additionally, when competitors see fat profit margins it encourages new competition which generally lowers profit margins for that industry or company.
As such, if you are going to chase after the latest fad or new tech gadget you better be incredibly adept at timing the turn and knowing how to quickly jump.
We know we can’t do that. And although we appreciate streaming videos and high tech phones it does not mean we are going to invest in those products. Their future is so uncertain that the disciplined investor should know to stay away when things fall outside their circle of competency.
This reminds us of a variety of lessons we have learned the hard way:
Although Buffett’s investing prowess is well-known and value investing makes sense conceptually, it does not mean these strategies work all of the time. Buffett has often appeared out of sync with the markets many times over the past 20 years—only to be proven wise over the long-run.
Generally to see the wisdom of any investment strategy a wise investor will give it 10 or more years. This is usually enough time to observe the full economic cycle. It also smooths out outliers associated with the latest hot stock or strategy.
Just because new technology revolutionizes the way we live does not make it a great investment. Some of the greatest innovations have been terrible investments. Consider auto makers, airlines and internet providers. They all truly transformed the way we live but have stunk as investments. Conversely, who would think that soda water, ketchup, or ice cream would prove so profitable?
For our money, buying predictable and consistent companies makes much more sense over long periods of time. However, if you are one to gamble and chase after the latest fad, be ready to time the turn and jump quickly. Although it sounds seductively attractive, most people who are left making that leap end up bruised and battered.