Trex Company (NYSE: TWP) is a small operation that has traded on the New York Stock Exchange since early 1999 and has risen (see chart) more than 150% while the S&P 500 has declined. Its business line, at least, makes it something that Warren Buffett might consider for purchase.
Trex manufactures composite deck materials. The product is a wood and plastic composite, called Trex Wood-Polymer, which offers "the appearance and workability of wood without wood's maintenance requirements." Trex is a small operation, but it's rapidly expanding. Its annual sales, earnings per share (EPS), and year-over-year revenue growth since 1998 are as follows:
Sales Growth EPS
1998: $46.8m N/A $0.85
1999: $74.7 60% $1.14
2000: $117.6 57% $1.37
Now, if I were to show you that table, and you didn't know what the company's business was, you would probably be interested in the stock. As an investor, you might say, "Look at that! Annual sales growth of nearly 60%. It must be a new company in a snazzy, exciting, high-tech industry."
If I then told you that this company sold, basically, deck plastic, you would probably be crestfallen and say, "Oh. Next?"
Technology versus basic needs
So many investors are much more excited by new, fast-growing, but speculative technology companies rather than fast-growing, basic materials companies. Arguably, this high-tech focus espoused by many investors is misplaced because, well, what is more certain to remain a viable business? Answer: a basic materials company, not a young technology company.
Warren Buffett's investing performance since 1965 -- a stunning return of 23.6% annualized versus 11.8% for the S&P 500 -- emphatically demonstrates that you needn't invest in the latest, greatest technology stocks to earn excellent returns. During the great tech boom of the past 30 years, Buffett's Berkshire Hathaway (NYSE: BRK.A) is famous for world-leading returns that it earned by investing in anything but tech. It invested in candy, jewelry stores, beverage and food companies like Coca-Cola (NYSE: KO), and furniture and basic material makers, including Acme Building Brands, a seller of bricks.
Last year, Buffett's company purchased a manufacturer of industrial coatings, a maker of tufted broadloom carpet, and a manufacturer of insulation and building products. As Warren deadpanned in his annual letter, "Try to control your excitement."
But investors should be excited if these are the types of businesses that could, in the right situations, earn strong returns. It shouldn't matter if the business is bricks. Investing shouldn't be about buying "cool" stocks with names like Net2000. Investing should be about, first, preserving your capital (nobody invests to lose money) and, second, about growing your money at a higher rate than you can earn from other, safer investments. If that means buying a brick maker, you buy a brick maker.
So, why are a majority of us always so excited by risky new technologies, and inclined to put our money there? Why do we (including me) persist in trying to hit that elusive home run in complex technology stocks when 99% of the home runs in investing come about only through decade-plus investments in steady, reliable growers?
Warren Buffett's lessons are continually repeated, and he is universally the most-admired investor in the world, and yet most of us don't invest like him. You know the sentiment: "Those stable, boring manufacturing companies are great for Warren Buffett, sure. For my investing strategy, though, I'm going to buy technology companies." (And then there is an unstated sentiment: "I buy technology stocks even though I typically only understand what the companies do in the broadest sense.")
We all admire Warren Buffett's outstanding investment performance, but we are usually bored with the businesses that he buys. In fact, many of us will not consider such industries for ourselves. Isn't there something very much in error with this thinking? It's as if we love the cook and recognize his cooking to be the best in the world, but we won't eat his food.
We end on that perplexing thought, and we pick up with Trex next time, continuing our high-growth study. To discuss today's topic, please read this short post, and then reply.