FOOL ON THE HILL
An Investment Opinion
What would you buy? How would you go about analyzing a company so you can count on it to provide superior returns 10, 20, even 50 years hence? Not a very easy task, to be sure. But even without this limitation, every time you make a stock transaction, aren't you saying, "There is no better place in the world for my money than in this company"? Isn't it interesting to think that when your due diligence tells you to buy a company, there is someone on the other side of the transaction who has concluded just the opposite, that they would be better served by selling?
There are several ways we could approach this. We could look at the universe of stocks and try to find the safest company. We could take a flyer that some small company with a potentially world-beating technology has both the market potential and the managerial talent (and depth) to provide huge returns. Or we could split it right down the middle, opting for a company that provides some safety, some ample potential for long-term growth, management and market breadth, and, for good measure, some income from dividends (which can be reinvested, for sure).
I would approach this problem using a framework that encompasses both quantitative and qualitative measures. The best one I have ever come across is Phil Fisher's 15 Points, presented in his magnum opus Common Stocks and Uncommon Profits. Fisher's holistic evaluation process is as the root of both Rule Breaker and Rule Maker investing, and is also credited by such luminaries as Peter Lynch and Warren Buffett for some of their philosophies as well.
So if I were to have one -- and only one -- company to invest in, I would want to see:
1. A company that has products or services with sufficient market potential to make possible a sizable increase in sales for at least several years, like Cisco (Nasdaq: CSCO), with a market that is expected by some to continue growing at 40-plus percent for the foreseeable future.
2. A management with the determination to continue to develop products or processes that will further increase total sales after the growth potential of current product lines have been exploited, like Schlumberger (NYSE: SLB), which turned an oil-exploration business into an information technology powerhouse.
3. A company with effective research and development in relation to its size, like Amgen (Nasdaq: AMGN).
4. A company with an outstanding sales organization, such as Pfizer (NYSE: PFE), which has leveraged this expertise into co-marketing agreements with its competitors.
5. A company with worthwhile profit margins, like Microsoft (Nasdaq: MSFT), which has net profits of 40%.
6. The company must also actively fight to increase profit margins, like Coca-Cola (NYSE: KO), with its streamlined business model.
7. The company must display outstanding employee and labor relations, like United Parcel Service (NYSE: UPS), which, in spite of a strike in 1997, has engendered a deep sense of belonging within its staff. Its current CEO and the majority of the executives came from UPS labor.
8. The company must also have outstanding executive relations, like Nokia (NYSE: NOK), which has a tradition of periodically and programmatically reshuffling its executives so they can retain familiarity with all facets of the business.
9. The company must have depth to its management, like American International Group (NYSE: AIG), with a management that has succeeded in profitably writing insurance in markets most other underwriters would not touch.
10. The company must have a historical tradition of cost analysis and accounting controls, like Intel (Nasdaq: INTC), with its culture of granting ownership and fiscal responsibility to members of a project.
11. There must be clues to the company's excellence within its industry, such as the long-term differentiation of American Express (NYSE: AXP) and its ability to cross-leverage its banking, travel, and marketing information.
12. The company must have a long-term view in regard to profits, choosing the path of building goodwill with its customers and vendors, rather than playing win/lose in all of its transactions. General Electric (NYSE: GE) works this way.
13. The company must make sufficient money so that future growth will not require equity financing, diluting the value of existing shares. Automatic Data Processing (NYSE: AUD) has done this, with 154 consecutive quarters of revenue growth (that's 38 years).
14. The company must be as open with investors during times of trouble as it is when things go well, like America Online (NYSE: AOL), which actively engaged customers and investors alike when it faced a severe oversubscription problem with its network in 1997.
15. The company must have a management of unquestionable integrity, like Berkshire Hathaway (NYSE: BRK.A), which has a chief executive whose total compensation package is minuscule in comparison to that of his peers, which gives cash rather than options, which allows its shareholders to designate charitable investments, and which saw its chairman take full responsibility for the company's performance in 1999, the first year in nearly two decades that the company's book value trailed the S&P 500.
Obviously, excellence in all of these areas is a lot to ask of a single company. But if you can only choose one, it behooves you to make sure that you're putting your faith and your money into a company that will not only exist in the future, but also thrive. If you find a company that passes all of these tests, you may want to think about crafting a portfolio around it.
But our exercise here is to choose one company. To my mind, the choice is clear: I want to choose a company that is designed so that it can run in all sorts of economic atmospheres, one that can survive even the disaster that is incompetent leadership. That company is Berkshire Hathaway. Warren Buffett has allowed the business components of Berkshire to run without his interference. Berkshire is insurance, it is jewelry, it is furniture, it is Dairy Queen, it is shoes, it is electricity, it is jets, it is flight services, it is newspapers. And it is also a company that owns large portions of other companies, each of which were chosen by the greatest investor to have ever lived. Even if Mr. Buffett should be unable to work, starting tomorrow, neither the wholly owned companies nor the investees would be affected in their internal operations.
It is a company built to last generations, and if I had to choose, it would be the only company I would own.
I'm sure you have opinions as well. Please let me know on the Fool on the Hill discussion board what company you would choose. Remember, in this exercise, once you choose, you can't change, so think carefully, and be sure to tell us your reasoning.
Bill Mann, TMFOtter on the Fool Discussion Boards