I Prefer to Keep Things Simple

Targeting the long run.

Jul 18, 2014 at 2:15PM


You've probably heard the story about the guy who invented the game of chess.

It goes like this: An inventor brought his chess board to the emperor of China, who was so impressed he offered to grant the man one wish. The inventor had a simple wish: He requested one grain of rice for the first square on the board, two grains for the second square, four for the third, eight for the fourth, and so on. Sounding like a modest proposal, the emperor agreed. But filling the chess board's last 10 squares would have required 35 quintillion grains of rice – enough to bury the entire planet. Unamused, the emperor had the inventor beheaded.

While I doubt the story is true, its message is important to understanding the power of compound interest: When things grow exponentially, gains look tiny at first, modest in the middle, and then -- very suddenly -- they shoot utterly off the charts.

The key to making compound interest work is sticking around long enough to make it to the end of the chess board. That's where the massive gains are. It's why, of Warren Buffett's $63 billion net worth, $62.7 billion was added after his 50th birthday, and $60 billion came after his 60th.

You can apply this same logic to individual companies. My friend Patrick O'Shaughnessy recently calculated the average annual returns of all major sectors over the last half century:


Consumer staples – food, tobacco, and household goods – win. Technology loses. Consumer staples also produced some of the lowest volatility, while technology stocks were the most volatile bunch.

There could be all kinds of explanations for this table. Patrick notes that consumer-staple companies tend to have strong brands and moats that prevent newcomers from encroaching. Valuations could also play a role. So could luck.

But here's an explanation I find persuasive: Innovation is awesome, but it's hard and risky. Companies that are required to constantly change are constantly going out of business, and for each success story there are countless and constant failures. Boring companies like food and beer require little change. They just plug along quietly, selling the same products year after year. That sounds dull, but they are the ones most likely to survive long enough to make it to the end of the chess board. And the end of the chess board is where things start getting ridiculous. 

The single best stock to own of the last 50 years was cigarette giant Altria (NYSE:MO). Its stock compounded at an average of nearly 20% a year for half a century – enough to turn $1,000 into more than $8 million.

The last 50 years was the era of technology, when the world went from abacus to iPad. Yet the single best company to own sells the same product today as it did 100 years ago. Part of this is because Altria is a successful company, of course. But its secret is that it's been a modestly successful company for an immodest amount of time. Lots of companies earned 20% annual returns for shorter periods of time, but Altria has earned them for decades. That enabled compound returns to go from impressive to extraordinary.

Investors have a tendency to go for the highest growth today. Some can invest that way successfully over long periods of time. But the more an industry changes, the harder it is as an investor to consistently bet on the ride side of change. I prefer to keep things simple. I like companies that sell the same thing today as they did 50 or 100 years ago. Food, household goods, those kinds of things. These companies are boring today, but they're more likely to be alive twenty or thirty years from now – all the way to the end of the chess board.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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Morgan Housel owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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