Boring Portfolio Report
Tuesday, January 23, 1996
BORING THOUGHTS ON STOCKS
by Greg Markus (MF Boring)
Let me begin this section with a word about the nom de Fool "MF Boring." I don't think of myself as boring, but over time I've discovered that the kinds of companies I invest in tend to be ones that do boring things.
I've invested in companies that make chiropractor's tables (Standex International), cement (Texas Industries), steel (J&L Specialty), carbon black (Cabot), water heaters (AO Smith), manufactured homes (American Homestar), and so on. Boring stocks have easily outperformed many glitzy, no-earnings bio-techs or "Internet plays"--all those companies that are going to be "the next Amgen," or "the next Microsoft."
But there's a difference between a "Boring" company and a just plain boring one. The latter not only do boring things but are also likely to have stodgy management, out-dated products, and uninspiring earnings: flat-liners.
The Boring companies that catch my eye (and wallet) have a sense of quality about them and a demonstrated capacity to grow. I'm not averse to investing in so-called high-tech companies, provided they meet my other criteria. I believe in a diversified portfolio (to reduce risk), and no one should be without some ownership of the technology sector. It's often tough to find stocks of technology companies that sell at prices I'm willing to bear, however--something I'll say more about later.
The Boring stock selection strategy could be described as Peter Lynch's "One Up on Wall Street" meets the Gardner brothers' "The Motley Fool Investment Guide," with some of Robert Pirsig's "Zen and the Art of Motorcycle Maintenance" tossed in. In a nutshell, that means I like to buy:
* attractively-priced stocks
* of really high-quality companies
* that offer terrific products or services,
* are situated in reliably growing industries,
* earn lots of money for shareholders thereby,
* and are likely to continue doing so for a good while longer.
Also, the company has to accomplish all this in a way that is properly respectful of its customers, the broader public, and the Earth. (If that last part is a tad too "politically correct" for you, what can I say? I'm wide open to all kinds of investment advice, but if I'm managing the portfolio, that "respectful" part stays.)
How do you find such stocks? Good question. Peter Lynch says to invest in stocks of companies that you have personal knowledge of, companies whose products or services you can evaluate yourself. That's fine advice, as far as it goes. But it's not always (or even often) as easy as that.
Here's an example of what I mean. I teach at a large university. All the students wear Timberland boots. They're nice boots, well-made, and sell at a premium but not outrageous price. Should we run out and buy shares of Timberland (NYSE:TBL)? Probably not if we plan on making money any time soon. The company had trouble keeping up with demand, then they got stuck with too much inventory when tastes changed, then they added some new product lines that quite didn't pan out as hoped, and so on. But you still see thousands of pairs of Timberlands clomping around town every day.
What else do I see as I look around campus? What products do I like--or other people seem to like? How about Apple computers (NASD:AAPL)? I don't think I could live without my Mac. But buy Apple stock? No, thanks: great computers, troubled company. What about Starter (NYSE:STA)? Everybody's wearing their baseball caps! True, but the stock's been a non-starter. McGraw-Hill books (NYSE:MHP)? Umm-m-m, pass for now. TCBY Frozen Yogurt (NYSE:TBY)? Yummy yogurt, stale stock.
My point is not that your personal knowledge and tastes are worthless as starting points for investing ideas--not at all. Occasionally I've found terrific stocks using Lynch's advice: all the Hewlett-Packard (NYSE:HWP) gear within arm's reach as I tap away on this story is one such example. H-P not only makes terrific products; it's also an admirable company, and its shares have been an outstanding investment for many years.
All I'm trying to say is that you shouldn't rely on your own experience mechanically or universally as a source of investing cues. Sometimes what you like (or even what lots of people like) turns out not to translate into a great stock. You need to look at the business end of things: sales growth, earnings, profit margins, company management, lots of stuff. None of it is intrinsically difficult, but it does take some time.
Background reading and research can be a good source of investment ideas. I look for leads everywhere: daily newspapers, TV, all over online services and the Web, The Motley Fool (naturally!), candy wrappers, whatever. I read Value Line carefully--highly recommended--and Barron's, Fortune, and Business Week. And about 20 other things.
It's not necessary to do all this reading to be a successful investor. The "Beat the Dow" strategy (described elsewhere in The Motley Fool) requires something like 15 minutes of work per year and performs formidably. Maybe someday I'll be happy with "Beat the Dow," although I kind of doubt it. I prefer to *learn* something about companies and their business practices and products as I make my investment decisions. To me, that's the fun part.
A quick example: I first learned about Gleason Corp. (NYSE:GLE) from a story in some trade magazine I found in the seat pocket on a flight to Pittsburgh. Gleason makes machines that make gears for trucks and automobiles, and they're the best in the business. So when I got back home, I read up on Value Line's coverage of the company and discovered that VL liked Gleason. In my folder in Fooldom, I asked if anybody else had heard about Gleason, and I received responses from a number of folks who knew the company first-hand. I bought GLE and made some money with it.
Sometimes I work backwards, and start with the stock, not the company. The stock may be the result of a screening search using parameters that fit my desired criteria. Or I may review a list of analysts' "highly recommended" stocks, or scan the list of recent earnings reports posted in The Motley Fool for likely prospects. Then I go back and research the company. The main point is that wherever I start, I don't buy the stock until I've checked out the company.
I prefer to invest in companies that are small- to medium-sized: not so micro as to be excessively volatile (or inert), not so huge as to be heavily owned by big institutional investors and followed by 15 or 20 analysts. By small- to medium-sized, I mean companies with market capitalizations in the $100 million to $1 billion range, although I again caution against applying these guidelines too rigidly.
I'll buy into micro-caps or Bigfoots on occasion if the story is otherwise compelling and the stock offers good value (more on that in part 3). Nobility Homes (NASD:NOBH), a Florida-based maker of manufactured homes with a market cap of only $24 million, is an example of the former, while Cabot Corp. (NYSE:CBT), the king of carbon black sporting a market value in excess of $2 billion, is a stock in the big-cap realm that I've owned profitably.
I like companies where the managers and employees own a good chunk of the stock, but not too much. If insiders don't own shares in their company, I have to wonder why. On the other hand, if they own 60 or 70 percent of the shares, I have to ask whether I want to risk some big insider suddenly selling out--it happens.
Coming tomorrow: Evaluating Stocks (part 3 of 4 in the Boring Approach: Boring Thoughts on Stocks).