At the 2018 Berkshire Hathaway shareholder meeting, Charlie Munger excoriated the get-rich-quick attitude of the younger generation that wrote him letter after letter seeking his approval to invest in Bitcoin. Munger responded, in characteristic fashion, by pointing out that everyone wants to start a bar, own the hottest stock, or seek a quick buck in the cryptocurrency market.
Of course, what I have enjoyed about following Charlie Munger throughout my life is that, not only will he explain to you the things that do not work so you won’t continue in folly, but he will often also provide a supplemental illustration of what does work instead.
Munger added that, when he would hang out at a particular Omaha country club in the 1960s, he encountered a man who started a company dedicated to removing dead horses and other large animals from the property’s of Omaha’s affluent. Across the entire extended metro area, he’d average a call or so per day and charge $3,500 for the animal’s removal. Boom, you have a business that generates $1.2 million per year in revenue.
In prior articles, I’ve used trash removal as the premier example of an unsexy business that nevertheless builds wealth. It turns out, I wasn’t creative enough in depicting unsexiness–I failed to elevate to the next step and include animal carcasses in the debris.
Once I discovered the elementary basics of investing, the most life-altering knowledge that I acquired at the intermediate stage consisted of recognizing that many ordinary or even depressing-looking business in your community could be more profitable than you ever imagined, throwing off tens of thousands of dollars in annual profits for its owners. It led me to develop the presumption: If you encounter a business in your community that has “been there forever”, there is a darn good reason why. It probably mints cash for its owners.
For instance, very few people would be interested in competing with Carriage Services, Inc., a manufacturer of caskets, funeral merchandise, and operate of 178 funeral homes and 32 cemeteries.
There are thousands of young men out there trying to sign the next great app that will take off in the social media economy, but there aren’t many people out there trying to design a new casket that can be mass-distributed. The general distaste and lack of appeal for an industry at large is a competitive advantage or economic “moat” because a statistically non-existent population has the passion to spend a lifetime upending the industry.
Finished wood products, as a whole, enjoy operating margins on average of 14.5%. And yet, the Carriage Services’ caskets carry a 25.0% profit margin. That operating profit premium can be partially explained by the fact that designing a casket does not attract the type of competition that say, designing furniture might, and creates an absence of competition that supports higher profit margins.
On a year to year basis, the extra profit margins resulting from the lack of glamour and competition in the industry may not be perceptible. But, applying C.S. Lewis’ adage of “isn’t it funny how day by day nothing changes, but when you look back, everything is different”, the difference becomes staggering over time. Even though no one things to invest in funeral merchandising, Carriage Services quietly has compounded at a rate north of 15% annualized since 2002, fulfulling Peter Lynch’s “Ten Bagger” imperative in just sixteen years.
Very few people are trying to get rich selling caskets, and for those who do try to get rich that way, the path carries much less competition. Off-putting industries are often where high systemic profits reside because these types of businesses have duties that a customer base needs discharged, and the opportunity lies in the few number of industry participants that want to discharge the duty.