Wednesday, October 2, 2013

Assorted investment musings

Oftentimes I'll have some market or investing observation that I'll be able to grow into a post.  Often though I just have some fragments of thought that don't really merit a post on their own, but are worth considering.  This post is a collection of things I've been thinking about recently as they relate to the markets, investing, and business.

Patience

If investing types were like restaurants value investing would be the long drawn out four course meal.  Trading and momentum trading would be hitting up the most popular fast food joint for a quick fill up, at the end of the day the diner's stomach is full from both, but supposedly more satisfied from the longer meal.  The reality is many value investors are eating at Chipotle and calling it fine dining.

The giants of value investing preach that value will eventually be realized somewhere between three and five years.  Yet I read posts where people aren't willing to invest unless there is a catalyst on the horizon that will unlock value in the next six to twelve months.  What ever happened to buying cheap things and waiting five years?

I don't think most investors are patient enough to hold a stock for five years, or the majority of their stocks for five years.  Granted I would love everything I purchase to jump 100% the day after I buy it as well, but I realize that's not going to happen.  Waiting has a nice built in side effect, it slows down portfolio turnover.  I own slightly over 50 stocks, somewhere between five and ten appreciate to fair value in a year on average.  This means I have a portfolio turnover of about 20% which keeps taxes at bay and keeps the workload for finding new ideas to a reasonable amount.

I couldn't imagine turning my entire portfolio in a year, I couldn't find 50 new investment ideas, I'm not even sure I could find 10.  But I am reasonably confident I can fine one or two a month which is all I need.

Simplicity

I've spoken before about simplicity but I believe it's always something that needs to be at the forefront for me.  I appreciate a complicated investment story as much as anyone else, but it's important to be able to effectively communicate a thesis in just a few words.  I was talking to my brother-in-law's brother-in-law this weekend about advertising.  He works in advertising and conducts focus groups to determine the effectiveness of labels and ads for some major national brands.  He said universally people will give five seconds of attention to something new, if you can't grab their attention in five seconds their interest moves on.  This is why simple and straightforward ads work better than walls of text.  I think the same thing relates to investing.  When I see an investment thesis and it requires that I understand 15 years of backstory I lose interest, unless right up front there is a killer attention grabber.

Some of my best investments could be summed up in about four bullet points.  When those points stop being relevant it's time to sell.

Retail

I generally avoid retailers as investments, they're difficult and take a certain type of investor.  Many retailers become legitimately cheap because their general popularity has waned.  Retailers sell popularity, popular fashions or popular dining.  Once the freshness fades sales often move on, but there are always exceptions, Red Lobster and Olive Garden come to mind.  There is no freshness there, I'm honestly amazed that anyone eats at Olive Garden considering the much better, and more authentic Italian dining in our area, yet there is always a wait.

The lifecycle of retail is interesting, my wife and I recently had a conversation about this.  We drove past a JC Penny and my wife commented how it was dying, but it made sense because so many newer stores had taken its place.  Her point was that in the US there are only so many consumers, a number that's roughly growing with population and immigration growth.  Unless consumers start to spend more of their income there is a fixed amount of money that can be allocated to retail consumption.  This means if a store is experiencing wild growth it's coming at the expense of another store.

If a retail turnaround is going to happen it means that a once dying store needs to steal back their customers from another more popular store.

Another thought along these lines is often that a popular retailer is in a newer area considered a good location.  I love comments about older stores where someone will say they wonder why they're located in such a bad spot.  At one point that bad spot was the good spot, but time took its toll.  Eventually those new spots could become bad spots and the lifecycle continues.

A related thought to this is that while I do a lot of international investing I generally try to avoid foreign retailers.  I also avoid retailers that I can't visit.  There is a certain pulse to a company that one can gather by visiting.  I don't mean foot traffic, but how goods are displayed, how the stores are laid out etc.  These things play into the culture.  Shopping is such a cultural thing I can't imagine getting it right being thousands of miles away.  How do I know if the cheap retailer in Thailand hit a temporary bump, or if they aren't popular anymore?  I have this general sense in the US, but overseas it's impossible to know without going there.


3 comments:

  1. Very nice article and blogg ! i follow you everyday !!

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  2. I think you're generally right on with retailers and restaurants. If you can ride the wave, you may end up with a good return, but its tough to tell what is a reasonable price to pay and when is a good time to get out. I'll never forget when Krispy Kreme first entered the market locally. People went crazy. Within 5 years the store had closed. However, when I first started investing, I made a nice profit investing in Buffalo Wild Wings (I should have held on longer, lol). But in the end, I think you're right. These businesses sell a new idea. But over time, the novelty fades and some competitor comes up with the next new thing.

    My take on JCP is different however. Back in 2011, I think the brand, like any, needed to be freshened-up a bit,even though the company was still making money. Unfortunately the company made a disastrous strategy move without properly testing it (mainly getting rid of coupons and rewards programs). Sales plummeted. At the same time the firm remodeled the majority of their stores and enhanced the operational technology (huge capital outlays). I'm of the view that the consumer will come back as the company reverses course back to the traditional coupon/sales model that has been successful and is industry standard. The consumer may even be happy to find fresh new stores. The quarterly results will ultimately tell the story.

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  3. Another excellent post, Nate. I agree with you on not investing in retailers which you can’t visit. It is much easier to get a picture of, say, a big grocer’s if you can actually check it out for yourself. Also, JC Penny’s loss of customers is largely because of its advertising mishaps, wouldn’t you say? Regardless of its long and illustrious history, one wrong message, and customers are turning elsewhere…

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