I've gotten a number of extremely interesting responses to yesterday's commentary on Warren Buffett and His 20 Punches, wherein I noted just how much care an investor would probably take in buying a stock if she were limited to investing in only 20 companies in her lifetime.
What people wanted to know, in surprisingly large numbers, was how an individual investor could possibly get to know a company like General Electric (NYSE:GE) well enough to make the decision to invest under those conditions.
There was a general theme here: "Hey, I work for a living! I don't want to be some GE-studying grasshopper for several years while I dig into all of its businesses, from doilies to dockyards!" OK, I made up the doilies to dockyards thing. And I took a bit of creative license with the Kung Fu reference. But the emails, they were real. And the question is a good one: How can you possibly do enough research to get to know companies with extraordinarily complex or esoteric business models?
Here's my advice on tackling GE, starting the potentially interminable process to get to know the company from top to bottom.
You ready? This may be the most important investing information you ever receive.
Pick another company.
There are 6,000 stocks on the three major U.S. exchanges, ranging from GE and Microsoft (NASDAQ:MSFT) big to A.D.A.M. (NASDAQ:ADAM) and Oil-Dri Corporation (NYSE:ODC) small. If you're going to take the time to tear apart a company, why not start with an easier-to-understand one?
I was thinking about this last night, and I just can't remember the last time I saw a good piece of research on GE. It's obviously not because the company is obscure -- it's among the largest in the world. But when it offers reinsurance, medical systems, aircraft engines, and lightbulbs, that's a heck of a lot of moving parts to break down to start to gain understanding. I contend that financial journalists -- like most people -- look at GE's business model(s) and simply don't know where to start. So they don't.
It's not really OK to be lazy in investing, but it's not mandatory that you step up and take all the toughest jobs either. Math quiz: You own two stocks: one phenomenally complex, the other sells collar tabs. Both go up 5%. On which company have you generated the better gain?
Go back to Oil-Dri for a second. Know what it makes? Absorbent clay, which is used in things like kitty litter. Now, I ask you: For a layman, does it strike you that the absorbent clay business is easier to understand than the intricacies of GE Capital? Would it make the equation more difficult if I noted that Oil-Dri also produces dog treats? None of this is to say that Oil-Dri is run by unsophisticated folks -- quite the contrary, there is some cutting-edge science involved in that business. But the moving parts are fewer, and you might be able to identify it as a company worth owning sometime before you're 80.
A quick look at some of the companies Tom Gardner and guest analysts have picked for Motley Fool Hidden Gemsmight prove illustrative. Among these have been a kitchen appliance manufacturer, a mattress company, a toy company, an Internet retailer, a low-price catalog retailer, and Coinstar (NASDAQ:CSTR), a coin-counting service. Tom and his team approach the study of these companies rigorously, but how much easier do you think it is to understand how Coinstar's business works than some massive conglomerate?
If you think a company looks interesting and find early on in your study that you've no hope of ever understanding it, you should remember that there is nothing that says you must invest in everything. So if it's too complex, why bother? Sure, if you're interested and challenged by the exercise, by all means soldier on -- expanding your knowledge base is never a bad thing. But if you find that you're getting hopelessly lost and disinterested, you do have another option.
"Next!"
Bill Mann once spent several months trying to understand General Electric, but realized that his calculations were all off because he forgot to carry the 5 in his calculations. He does not own any stocks in this article.
