Managing Other People’s Investments

While I am flattered—and I mean this sincerely but I’m not a good enough internet writer to make the depth of my appreciation jump off the screen—that some of you have written to me asking that I manage some of your money, sadly, that is not something I can nor want to do.

First of all, I mean that literally: I don’t have the proper licensing to start taking on investors.

And secondly, even though I understand that the management of other’s assets “is where the money is” when it comes to the financial services industry, it’s not something I’ve had much of an inclination to do because most people are interested in twelve to twenty-four month returns, and I have little desire to spend my life defensively explaining to others why stock selections aren’t performing better than the S&P 500 Index over the past six months, year, three years, and you get the picture. If I wanted to beat the market over the next ten years or so by owning high-quality blue chips, it could be done: it would be a portfolio loaded with Visa, Becton Dickinson, Disney, and the like, but I’d have no ability to tell you whether those stocks will be winners in 2015, 2016, or 2015 through part of 2016. Being right over a fifteen year period isn’t something that would be enough for most people; they want to see that they are right at every annual benchmark along the way. I couldn’t do that, and I wouldn’t want the hassle.

For instance, if I had been managing money over the past couple of years, I would have bought a significant block of IBM stock. Since 2011, IBM has returned 7.5% annually, while the S&P 500 has returned 18.5%. At this particular 2011-2014 point in time, it does look like a particularly bright decision. The catch, though, is that the P/E expansion experienced by the S&P 500 has been much greater, and will revert to the mean eventually. IBM, meanwhile, has been getting cheaper than usual over that stretch, trading at 12x profits instead of its usual 15-16x profits. Although most people don’t talk about, the business is doing fine fundamentally, growing profits by 9% each over that time. Over the next seven to twelve years, things will work out, but it’s this narrow snapshot of time when a particular decision is underperforming that I wouldn’t want to spend my life having to defend to people.

You saw these all the time—since 1920, Coca-Cola has experienced sixteen declines of 25% or more, and has experienced declines of greater than 40% eight times (I’ll rephrase that: of those sixteen declines of 25% or more, half of them have actually taken the price of the stock down by over 40%). Someone who bought the stock eighty years ago would have compounded at 16.5% over that time frame. Since the early 1970s, Coke has compounded at almost 13%. Since the early 1980s, Coca-Cola has compounded at over 15%. And since 1990, Coca-Cola has compounded at 11%. The evidence of Coca-Cola being a high-quality asset is apparent to everyone that spends time in the financial industry, yet imagine buying right before one of those steep declines.

People are going to think you are stupid because of the timing, even though those reinvested dividends at lower prices are actually turbo-charging the amount of wealth you will end up creating, and over the course of 15-20 years, your thesis about Coca-Cola is going to prove right. If Coca-Cola fell to $25 per share put kept paying its $0.305 dividend, earning $2.20 in total profits, and had no noticeable drop in future expectations, you should be excited about the new reinvestment opportunities it would provide, and the wisdom that you’d get a good deal purchasing the stock at $40-$45 isn’t negated just because a cheaper price comes along (e.g. buying General Electric at $12 per share during the financial crisis was an exceptionally intelligent decision, even though you could also have purchased the stock as low as $6 per share. The intelligence of a decision at a given time is not diminished by the fact that an opportunity to get richer, faster with the same stock later arrives. You look at the price, make an educated guess about future cash flows, and act accordingly if you like what you see).

The people who understand those fundamentals aren’t going to be asking for anyone else to manage their money, and the people who want to let someone else manage it may not appreciate that a superior business that will deliver 10-13% annual returns has been purchased, but at this point in time, the stock price doesn’t reflect what you are going to be getting over a fifteen to twenty-year period. If someone’s heart isn’t into the notion of owning excellent businesses for the long-term, it’s going to be a whole lot of work getting them to stick to the script when you’re getting those steep declines that you see two or three times per generation.