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By yttire
April 11, 2005

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X-post from HG Philosophy

I have to say that my investing philosophy is being warped by the climate we are in. I am starting to look for real bargains- with the plan of selling the stock within 3 years. This is no longer long term investing. I have to ask myself: how did this happen?

This is partially because the market really has not done much for 5 years. If steadily but slowly growing companies have their stock tickers stuck in one place for 5 years than my instincts start telling me to look for something better. What is better? Stocks which have become horribly undervalued and are likely to bounce back within 3 years.

Is this truly better though? When you are buying off horribly undervalued stocks you are necessarily taking on risk- there is no way a stock will become terribly undervalued unless there are some real risks floating around it. So one is becoming a risk monger. And you are no longer holding companies long term- for you sell it in favor of another undervalued security once it has reached a reasonable valuation.

Part of it is the change in society as a whole and the nature of its infrastructure changes. As I see it, from the 1940's capita consumption was rising dramatically. In fact, here is a nice graph of median family income.

From 1950 through 1980 incomes were rising pretty steadily. This meant that there were lots of niches of large businesses to carve into the landscape and succeed in a steady and deterministic way. Soda pop, automobiles, corn flakes, and support for all the myriad things. There were lots of niches where once you had established dominance there was a deterministic way towards growth.

What this meant that investing was best served by finding a large company, which had a nice product line, that was destined to grow as median family incomes rose.

Then, family incomes flattened out- and these deterministic growth curves slowed. Large companies like Dupont and Coke went from 15% growth to 2% (KO appears to have a revenue CAGR of 2% for the past 10 years, Dupont somewhat similar). This means that the strategy of finding the large stocks that were reliable growers based on increasing incomes is not a viable strategy.

There are still large growing companies expanding into niches- but now these niches are defined by changing consumer patterns and not by the overall increase in per capita consumption. My guesses here would be FedEx and UPS, because of the shifting away from some retail towards Internet shopping, and the health care industry, because of the increasing elderly population and our societies increasing interest in health care.

I am sure there are other large-scale trends, but not as easy to spot as the trend of "everyone is getting more money and buying more of exactly what they were buying before". So that leaves us who are unable to spot the demographic changes and in the middle of a secular bear contemplating what a good investment strategy is.

There are obvious openings in stocks, which are taking advantage of the change in culture- but most of these are sky high (Amazon, eBay, and Google). So the trick is to find the boring parts of our culture, which are shifting. And if you can't do that- you end up looking for stocks which are at exciting price points and purchasing them- and unloading them once they fly above intrinsic valuation because you actually don't trust them to maintain the 15-20% growth which their history implies they may achieve.


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