When Warren Buffett spoke to MBA students at the University of Florida in the early 1990s, he gave some of the greatest advice that budding entrepreneurs could ever hope to receive. He said that his investment strategy advantage is that he stuck close to his best ideas and wouldn’t feel the need to further diversify merely for the sake of diversification. If you have investments in twenty different stocks, and you have some cash available for an additional purchase, the highest compounding rate is likely to come from enlarging the position in one of those twenty stocks that you already own rather than purchasing a 21st stock. In my own files, I call this strategy/mental model “Fidelity to Your Best Idea”.
It is my contention that there are two ways that the average investor at home can gain an advantage over the algorithms, institutional investors, bankers, traders, and every other nebulous entity that we include in the definition of “Wall Street.”
My first conclusion is that investors can make money if they choose to embrace volatility. Whether it be oil stocks, media stocks, or financial stocks, certain sectors of the economy are prone to quick and sudden shifts that result in quick 30% rises or falls in their stock prices due to the recency bias that is created upon examination of a company with a cyclical business model (in other words, we overweight recent earnings results in performing expecting calculations of what the future for the business will bring.)
The Irish Dark Ages last for approximately 400 years (!) – from approximately a century before the birth of Christ until approximately 300 years after that. It was an astoundingly poor period in which twenty generations of Irishmen failed to improve their lot in life, meaning that a young boy born in Ireland in 300 A.D. could honestly say, “My life is no better than that of my great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great, great grandfather.”
Irving Kahn was an incredibly fascinating man that received less than his fair share of media praise during his lifetime. An intuitive individual that invested during the Great Depression and lived to be 109, Kahn was a unique example of what can happen when you have five variables working in sync: (1) raw intelligence; (2) an insatiable intellectual curiosity; (3) the capacity for decisive action; (4) a wildly long runway of 80 years; and (5) a decent amount of capital as a young man.
In 1928, Kahn had the gut sense that some type of shock to the system was imminent because valuations were trading at 4x the post-Civil War average despite only giving slightly above average growth. He then made an incredible decision. He sold all of his investments, held 70% of his net worth as cash, and took the remaining 30% and shorted a company called Magma Copper that was barely profitable during the Roaring 1920s was incredibly overleveraged.
Between 1998 and 2008, you may have noticed that Sonic drive-thrus didn’t change much. The same remote ordering technology. The same burgers. The same items. Prices that might have increased here and there. But nothing meaningful you could point to and say, “This is different than it was ten years ago.”
That was not a coincidence.
In 1998, Sonic was earning $30 million per year in total profits and had $100 million in debt. That was a slightly better than average balance sheet for a fast food operator.