The Three Most Liberating Words In Investing: “I Don’t Know”

I recently engaged in a conversation with a long-term reader (hat tip to you, Michael) who was unsure about the future of the PC and tablet market as he contemplated an investment in Intel. He has been regularly following the latest news items in the chip industry, trying to determine whether or not Intel is the right fit for a long-term investment.

Look—long-term investing does not have to be that difficult. When I look for a long-term investment, I want to find a company with such blindingly obvious long-term economics that it does not require much skill, time, effort, critical thinking, etc. to figure out whether or not the company will be pumping out profits for shareholders twenty years from now.

Take a company like Nestle. I don’t care if you are twenty years old, thirty years old, fifty years old, or seventy years old, this is the kind of company you can buy, hold for the rest of your time on this earth, and then pass the shares on to your children and grandchildren when your time is up. There are only a few dozen other businesses on this planet that are built for the long-term like it.

Take a minute out of your day and visit this Nestle Wikipedia page to take a look at the different brands under the Nestle corporate umbrella:

If you appreciate a good long-term business that will give you money each year, you will find this breathtaking.

(For those of you who are shrewd and knowledgeable investors, one thing I’d like to point out: when you visit the Wikipedia page, you will notice a lot of brands under the Nestle name that you typically associate with General Mills. Most likely, that is the result of a joint venture that has Nestle distributing General Mills cereals in certain European countries. Furthermore, Nestle follows in the typical European tradition of only paying out a dividend once per year, and you may be subject to certain foreign tax withholdings depending on your particular tax strategy, and I want to make clear that I am speaking in terms of Nestle’s general business performance rather than its particular attractiveness on an after tax basis right now).

When someone eats a Gobstopper, you generate profits that will go towards your Nestle dividend. When you drink coffee using Coffeemate, you are putting money in Nestle’s coffers that will fund the dividend. Whenever someone is chilling with a gallon of Haagen-Datz ice cream, they are contributing towards the Nestle dividend. If a jock somewhere eats a Powerbar, yeah, that is going towards the Nestle dividend. When someone eats a pizza from Tombstone or Digiorno’s, or eats a Hot Pocket, they are sending money into the pockets of Nestle shareholders. If you buy your dog some Purina or Beneful dog food, you are contributing towards the Nestle dividend.

I could keep doing this, but Nestle currently owns over 8,000 brands. It does not take a degree in physics from Cal Tech to figure out that Nestle is going to be making shareholders rich over the next ten years, twenty years, thirty years, and so on. If I could only own ten companies for the rest of my life, Nestle would occupy one of my slots. They dominate the grocery store. Name a country, and Nestle makes money there. This kind of buy-and-hold investing is easy.

But you know what is harder to figure out? What Intel will be doing in 2023, 2033, and so on. Long-term tech investing is hard.

Here is how I break down most investments:

(1) Some companies need to constantly innovate and come up with new products to maintain their edge. In other words, they need to constantly do things “right.” Imagine if Apple didn’t release any new products in the next fifteen years. Think they’d still be around, or a shell over their former selves?

(2) Some companies can run on autopilot and do not face much of a need to innovate. They need to avoid doing things “wrong.” Take Hershey. They sell chocolate. Imagine if all they did over the next ten years was sell chocolate bars. You’re still going to be rolling in profits, because there is only so much innovation in the chocolate industry. Imagine if Pepsi continues to sell potato chips without making much modifications. Think that would be a problem? Yeah, for the shareholders, because they’d need to figure out what to do with all the profits coming their way.

When I say that long-term investing is easy, it is not because I have any special insights about most of the companies in corporate America. When trying to determine where 90% of them will be ten years from now, my answer for the most part is “Beats me.” But if you focus on that 10%, you can build a good life for yourself of becoming a long-term business owner that receives regular cash infusions from your companies four times per year. How hard is it to figure out that Colgate will still be selling toothpaste in ten years? How hard is it to figure out that Clorox will still be selling bleach in ten years? It’s not. Those companies are easy to figure out, and that is why I spend my time discussing them. That fact that most of the world is dynamic does not trouble me, because it is easy to say “I don’t know” in response to the long-term future of most companies. I can figure out that Kraft will be selling Macaroni and Cheese ten years from now, and if you spend your life making those kinds of bets, you’re going to avoid a lot of the misery facing people who buy companies with unclear futures and think they are investing.


Originally posted 2013-07-19 05:02:52.

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2 thoughts on “The Three Most Liberating Words In Investing: “I Don’t Know”

    1. Tim McAleenan says:

      Rich, check out my tab "Master List of Stocks." Those are the companies I consider long-term holdings. That might be fertile ground worth looking at.

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