This image has been going around Tumblr, Facebook, Reddit, and other social media sites. It shows the products manufactured by a handful of companies, and how those few businesses, all but one of which are publicly traded, essentially control the entire packaged food, beverage, and snack industry. We’ve talked about this particular picture several years ago when the blog was smaller and more of a community, but it seems an appropriate time to re-highlight it.
This is what I mean when I talk about finding simple, easy ideas. If your initial purchase price is reasonable relative to earnings and assets – that’s important so read it a few more times – it is difficult to foresee a world in which one couldn’t make a significant amount of money over a 25 to 50 year holding period from owning a collection of businesses with these characteristics. Someone who owned all of these firms would be nearly assured of making money off of virtually every man, woman, and child in the United States.
Investing is not hard. Beating the averages, to the extent it can be done, is hard. By definition, a majority of people who attempt it are destined to fail (even if, in a perfect world, everyone were to improve their results through rational thinking, that would move the median line). But plain investing – putting money out today to increase your purchasing power over time – is a very simple thing. You can amass surplus capital by being average if you either have a lot of time or have a lot of money (only one is necessary, but both are fantastic).
What’s the formula? You find something people want that is protected from competitors, you pay a decent price to buy yourself into an ownership position, you hold enough stakes that if one or two of them fail completely like the wipeouts you saw at Wachovia or Lehman Brothers, you still emerge relatively unscathed, you hold it in the most tax efficient manner you can, and then you – if you’ll pardon the expression and allow me to quote the great billionaire Charles Munger and paraphrase the legendary portfolio managers at Tweedy, Browne & Company in New York – “sit on your ass”.
For example, it does not take a genius to see that Hershey Foods, trading at all-time profits yet an earnings yield less than the rate of long-term inflation, is not a good deal at these valuations. The firm is at least 30% overpriced. Sure, there may be surprises on the upside, but that’s gambling. The opportunity cost of buying it compared to something like, say, Chevron, at these valuations is simply too great. In the latter case, you are getting a base earnings yield of nearly 3x the rate of long-term inflation for a business that has grown profits by 15% and dividends by 8.5% for the past decade. Chevron’s earnings will nearly always be more volatile than Hershey’s but the valuation gap is what makes the difference here.
It won’t be smooth sailing. You will watch the quoted market value of your holdings fall by at least 50% once or more every decade or two – case in point: Chevron could lose half of its value tomorrow. Stranger things have happened. That shouldn’t matter as long as 1.) you aren’t forced to sell, 2.) you passed the first test of reasonable valuation on cost, and 3.) the underlying business continues to be profitable.
A drop in stock price should never concern you. A drop in profits should get your attention. A drop in dividends should set off alarm bells.
People make things so difficult sometimes. Every once in awhile, you’ll be presented with an opportunity to buy a Johnson & Johnson or Coca-Cola or Clorox or Unilever or Procter & Gamble at some incredibly low, or even fair, valuation. It might not last long, but when it does, if you have the intellectual courage to follow your own well-reasoned, fact-based risk analysis and write a few large checks, things tend to end up fairly happy a few decades in the future. That formula has worked for centuries. If something were to happen that changed it, odds are it wouldn’t matter what you owned because everything’s gone to ashes.