Over the past year, Best Buy has returned 59.24%.
Citigroup has returned 78.92%.
Netflix has returned 332%.
That’s real money. If you put $100,000 into Netflix this time last year, you’d have $332,000 today. That money is the difference between having neighbors that drive bouncy cars and having neighbors that own the used car dealership that sells the bouncy cars.
I owned none of those companies at any point in my life, and in all likelihood, I never will. And it’s not because I’m content with being inferior—rather, making that kind of money with Best Buy, Citigroup, and Netflix would be an example of me trying to play a game I’m not cut out for.
As far as I’m concerned, Best Buy has too many similarities to Blockbuster and Borders. It has been an anachronism ever since Amazon went mainstream. People go to Best Buy, test the electronic goods they want to buy, and then go online and buy it cheaper. This is an example of the customer acting rational. When there are convenient ways to purchase everything at Best Buy at prices that are often hundreds of dollars cheaper, you know you are dealing with an ultimately doomed business model.
There are not many areas where I disregard the teachings of Benjamin Graham, but here is one of them—Graham believed that every company, no matter how poor the economics, would become worthy of purchase at a certain price. I have no desire to practice that—if I believe there’s a good chance the company won’t be making profits ten years from now, I don’t bother. It’s not my skill set to deal with companies that require you to sell at some point or get harmed. I’ll stick with the companies like Coca-Cola and Johnson & Johnson which will enrich shareholders for generations to come if they choose to not to sell.
In the case of Citigroup, I have always stayed away from the bank because it is a mess. Its balance sheet is a mess. Its management has been historically dysfunctional. That is a terrible characteristic for a company that has high debt to equity, because it introduces the possibility of bankruptcy in the event of very poor economic conditions. Moynihan knows how to run Bank of America. Dimon knows how to run JP Morgan. Stumpf knows how to run Wells Fargo. Richard Davis knows how to run US Bancorp. I’ll stick with those guys, because management actually matters with bank stocks.
Selling macaroni and cheese at Kraft doesn’t take a genius. But with banks, the returns that shareholders experience are a function of the leverage that a bank takes on. Take on too little leverage, and you become the laughingstock bank that only piddles along at 4% each year. Take on too much leverage, and you can wipe out generations of conservatively built wealth—just ask the old shareholders of Lehman Brothers, Washington Mutual, and Wachovia how that works out.
In the case of Netflix, I have never wanted to own a company that relies on a video platform because that arena is constantly changing. Less than twenty years ago, you had to physically to show up at Hollywood Videos or Blockbuster to rent a movie. Then Netflix introduced mail-in DVDs and internet streaming. I have no idea how people will be watching movies in 2033. I can guess that people will still be eating Hershey’s chocolate bars then, or eating PepsiCo’s various brands of potato chips, but I have no idea where the average American will go to watch their movies. Therefore, I don’t even consider Netflix as a potential investment, because I don’t have the skillset to predict its long-term cash flows.
The fact that shareholders in these companies would have made substantial paper wealth over the past year does not bother me in the slightest. If anything, I’m happy for them. They risked their own capital, and they have been rewarded for it. But it would be dumb of me to deviate from my strategy just because someone elsewhere is making more money than I am. Especially because, in my case, it would involve engaging in investment practices that I do not understand. Nothing can throw you off your game quite like worrying about what other people are doing.
Originally posted 2013-08-10 08:25:46.