Joshua Kennon » walt disney

How to Find Investment Ideas

Joshua Kennon — Tue, 09 Feb 2010 08:53:48 +0000

Every time you shop at a company, see their products selling well, or hear good things about a firm, it is an opportunity to research a potential investment idea. It doesn't mean you should actually buy shares, but it might just be a great place to start your search. Think of all the investors that found Wal-Mart Stores, Nike, Dollar General, Microsoft, Home Depot, Walt Disney, or Coca-Cola long before they had appreciated 10,000% or more (but were known in virtually all American households).

Years ago, I wrote an article called Finding Investment Ideas for Your Portfolio for About.com, a division of The New York Times. I’ve been thinking for the past few days about how it is that I seem to come across so many opportunities and then I realized that most people like me are always looking whereas the average American isn’t.

By that, I mean that every time I walk into a business, without exception, the first thought that occurs to me as I look around is, “I wonder if this company is publicly traded.” If it looks promising, I add it to a mental list and during my regular research periods each week, I pull all of the information I can about the company, or the corporate parent, and begin attempting to value it conservatively. It only takes a few, or even one, great investment in a lifetime to be financially independent.

If my friends and family could actually hear my thoughts, it would be amusing. As we walk through the aisles of Wal-Mart, I am thinking to myself, “Wal-Mart has a net profit margin of 3.3%. So, if I buy this $49.95 video game, the stockholders, who are the owners, are going to generate after-tax profit of $1.65 on the sale. With a dividend payout ratio of roughly 30%, $0.50 of that will be distributed as a cash dividend and the remaining $1.15 will go toward expansion or stock buybacks. With 3,810,171,967 shares of stock outstanding, each share of the company is entitled to $0.000000000433051 of the profit.” Sometimes, I actually pull out a calculator to compute figures as I stroll besides the shopping cart.

It’s almost like a game of chess, or solving a puzzle where the pieces are constantly moving and half of the box is missing. I love the game. Particularly, I like that if I’m right, I make money for the people about whom I care, so they can buy nicer clothes, pay off their debt, take vacations, or send their kids to music lessons. That matters to me far more than the idea of owning a Net Jet. It provides me with a real sense of satisfaction. Most people can’t say they actually make a difference in people’s lives. I can.

Yet, this idea of looking for such opportunities never occurs to most people. Here’s an example from my own family …

Ed’s Sporting Goods: An Example In My Own Family

Members of my extended family owned a business called Ed’s Sporting Goods that at one time was the largest sporting goods retailer and team dealer in Northwest Missouri. Now, it was a successful business – far more successful than the average entrepreneur and something about which the owners are, and rightfully should be, proud.

Dollar General is a perfect example of a simple business, with an easy to understand model for making money, that people could have purchased and become very wealthy from over a period of 10+ years. The company was bought out by a private equity group several years ago.

I remember going out to lunch with my Grandma Kathryn at a local Chinese restaurant (we’ve done that since I was a kid whenever we’re both in town) and talking about stocks. She said that for years she had been thinking about buying shares of stock in Dollar General but had just never gotten around to it. I understood this perfectly because I had done the same thing with Apple (despite making a ton of money on companies such as American Eagle Outfitters, I stood by and watched Apple skyrocket 1,400% without buying a single share, even though I switched from PC to Mac both personally and at my businesses, knew how well it was doing, and greatly admired its management team!).

Had they taken just a tiny portion of the sales of Nike products and used it to buy shares of Nike stock, they would have had north of $4 million today from this single decision.

Anyway, a few days later, this got me thinking about how we often ignore what is right in front of our face because we are familiar with it. During its 25+ year rise, Ed’s Sporting Goods was a huge dealer of Nike products, from shoes to apparel. I started working on the math and asked myself, “What if they had taken just a tiny amount of the cash – even as little as what they spent on a part-time employee, and had instead regularly bought shares of this company that they knew, from first hand experience, was doing very, very well?“ I don’t remember the exact result, but I figured that my Grandmother and Uncle walked away from somewhere north of $4 million by missing that opportunity.

Why? People aren’t taught to look for those opportunities unless they come from wealthy families which, at that point, we were not. They also missed Wal-Mart, which placed two of its first 150 stores in St. Joseph and Warrensburg, where some of the first Ed’s Sporting Goods were! Walton’s company was literally a start-up right alongside their retailer, in the same city, and they shopped there personally. The same thing with Microsoft. The store, due to its screen printing business, was one of the first to adopt Microsoft DOS and later, Windows 3.1. The same goes for Rawlings Sporting Goods, which is now part of Berkshire Hathaway. And Blue Chip Stamps, which my dad said they used in California all the time, which is now part of Berkshire Hathaway. And Benjamin Moore, which operated a store next door, and is now part of Berkshire Hathaway. And Champion apparel. And Reebok. And Pepsi, which apparently my Grandfather drank all the time. The list goes on and on … but it shouldn’t be depressing, it should be exciting that every few years, we are all presented with more investing opportunities.

The Bottom Line

The bottom line of this is to point out that we are all surrounded by opportunity all the time. Here’s the million-dollar question (literally): How many people do you know who actually devote hours each day to identifying and then acquiring those opportunities? Most people would rather spend time studying new washer and dryer models, upgrading their furniture, or reading the sports pages.

There’s nothing wrong with that. But if you spend more hours each week planning on spending money, such as looking at new cars or houses, than you do planning on how to acquire more cash-generating assets, the result is going to be a drastic reduction in your standard of living. This pattern seems to be playing out with a lot of my friends from college who now seem to realize that you aren’t successful because you have the house, or you have the car, or you have the clothes. Those are merely by-products of having the wealth, which (again) consists of cash-generating assets.

Carl Barks Art Acquisitions & The Equity Markets

Joshua Kennon — Fri, 25 Apr 2008 04:50:48 +0000

This, ladies and gentlemen, is why I am rich. It’s a thing of beauty – just sit back, and watch. Ha!!! Now that the deal is closed, I can talk about it.

Scrooge McDuck by Carl Barks

You may have noticed, as Ellary emailed me a day or two ago, that we’ve been missing in action. Recently, some odd situations have developed in various markets throughout the world, some as a result of the credit crisis on Wall Street and some just because the inevitable nature of the world is that five-plus sigma events (”black swans”) occasionally manifest. This has happened in the animation world of late, especially in the works of a few key illustrators. I’ve been working with several auction representatives, including the person who headed the comic and animation division at Sotheby’s for decades, to build a collection as part of the e-commerce group’s investment portfolio. Money was reallocated from equities (actually, it was all fresh capital from operations so that’s not entirely accurate but I digress …)

Anyway, we’ve been silently amassing quite a collection by looking for distressed sellers and this morning, we added a jewel to the crown; although not the greatest piece in terms of importance, the sheer brilliance of it makes me laugh. There’s a well known print that Disney produced as a limited serigraph somewhere around 13 or 15 years ago. There are only a few hundred in the world, and most animation shops sell copies for around EUR3,200.00 – or a bit over $5,000 here in the US (for instance, see this shop) (the cheapest I’ve ever seen it is an American-based shop selling a single copy for $1,600); in fact, as a child, I used to have a scan of it on the invoices I would submit to my parents for working in their letterman jacket company making chenille products (25 cents for names, 10 cents for mascots …) It’s from a 1967 special where Scrooge explains inflation, monetary circulation, et cetera to his nephews.

Anyway, this afternoon at 4 p.m. Central Standard Time in Dallas, Texas, an animation auction was held where we picked up a few pieces of things that had some interest to us but weren’t on the primary list. However, one item – the one we’ve been discussing – meant a lot to me. Very few people in the world were paying attention, the condition was excellent, and I kept my mouth shut to everyone but Aaron and my immediate family.

The seller must have needed cash, or have inherited it and simply wanted whatever he or she could get for it because they waived the reserve price.

So guess how much I got it for on the live floor auction? $24 plus an $11 buyer’s premium. I’m not freaking kidding you. That is the favor of God. I picked up the same piece of art that is selling in Europe for more than EUR3,200 and in the U.S. in one store for $1,600 for $35. It’s being batched with our other acquisitions and shipped in the next two weeks. It’s no different than what we do here in the stock market. We don’t buy often, instead piling up cash in hoards until something interesting comes along (Buffett calls it “bagging elephants”) and then we unleash the full fury of our purse. Between Wall Street’s meltdown and our art program, I’ve acquired more stuff than I can keep track of in the past three to four months.

Occasionally, opportunities such as this do present themselves. I’ve watched, and wanted, some of this art since I was 16 years old. The market never fell apart until now. Now, not only do we get the joy of having it hung on the wall, but if and when I ever went to sell it twenty or thirty years in the future, we just proved the old retail maxim about generating huge returns on invested capital: “Well bought is well sold.” Actually, I take the hung on the wall part back because I don’t like having valuables around so much of this will either stay in a safe deposit box in a bank vault or we’ll pay to have it locked up somewhere several states away …

Now, if you’ll excuse me, I might just walk out the back door and scream with joy outside before delving into the newest Tiffany & Company 2008 annual report.