"Life moves pretty fast. If you don't stop and look around once in a while, you could miss it."
-- Ferris Bueller
Good ol' Ferris really hit that one right on the head. On the speeding train that is life, the scenery has a tendency to change awfully quickly.
My fellow Fool Morgan Housel did a brilliant job underscoring that fact earlier this week. By highlighting the vastly different rhetoric used in President Bill Clinton's State of the Union address back in 2000 and the more recent speech offered by President Barack Obama, Morgan concluded that: "It took just 10 years to go from Brady Bunch to Mad Max. I think that's incredible."
I couldn't agree more.
This is a particularly gnarly problem for an investor in individual stocks. If the world can change so drastically in just 10 years, how can an investor possibly hope to figure out how much profit a company will log in future years, and, therefore, how much the company itself is worth?
Benjamin Graham -- the guru to super-investor Warren Buffett -- was all over this problem. In his groundbreaking tome on investment valuation, Security Analysis, Graham wastes no time in writing this about common stocks:
As far as the typical common stock is concerned -- an issue picked at random from a list -- an analysis, however elaborate, is unlikely to yield a dependable conclusion as to its attractiveness or its real value. But in individual cases, the exhibit may be such as to permit reasonably confident conclusions to be drawn from the process of analysis.
Go back and read that again
I don't know about you, but every time I read that, it floors me. This is the father of value investing basically saying that for many (most?) stocks, a detailed analysis is going to be just north of useless in terms of determining the stock's investment merits.
Why is this? It's all about the darned future and how unpredictable it is. Or, as Graham put it, the element of "potentiality and prophecy."
Consider Netflix (Nasdaq: NFLX) for a moment. How can we hope to come to any sort of "dependable conclusion" on the future of this company? Netflix has only been in existence for 15 years and has been a public company for just a decade -- a baby in corporate years. The industry has changed drastically in the short time that Netflix has been around. When it came public 10 years ago, it was all about mailing DVDs to customers, but today the future of the company is increasingly about streaming videos over the Internet. Major competitor Hulu didn't exist until 2007; Amazon.com's Prime service was introduced in 2005, but it wasn't until last year that it started offering the streaming-movie feature.
Don't misread what I'm saying here. Netflix has been phenomenally successful, but if we step back and honestly consider the changes that could take place in a decade, it seems there's very little we can conclude about Netflix's future for sure. Remember, at one time Blockbuster was the last word in movies at home.
Which is all to say that, yes, as Morgan highlighted and Ferris Bueller immortalized, life moves fast and things can change drastically. Trying to envision a numerical future for a young company in a rapidly changing industry may be akin to betting on the 2022 World Series.
The dependable alternative
No company gets to sit out from this churn of time, and the results can be deadly. The advent of the digital camera inflicted a wound that eventually led to Eastman Kodak's bleeding out. On the other hand, some companies adapt well and prosper despite big industry changes -- IBM's (NYSE: IBM) conversion from a hardware-focused tech giant to a more consulting-type software and services company illustrates that brilliantly.
And yet there are some things that change so little that investors can make more informed calculations regarding the current position of the company as well as its potential for the future. Consider the following three examples:
- Coca-Cola (NYSE: KO). Sure, some things change, such as the fact that you're more likely to be drinking a Coke out of a can than a glass bottle today. But the endurance of the consumer preference for this particular cola formulation -- as well as the enjoyment of a host of other brands the company owns -- means that there is good reason to believe that there will be as much or more Coca-Cola beverages being enjoyed 10 years from now.
- Procter & Gamble (NYSE: PG). According to brand expert Interbrand, in 2011 Gillette was the 16th-most valuable brand in the entire world. And this is just a single iconic brand under P&G's umbrella. The computing power that a handheld device will boast in 10 years will undoubtedly change drastically, but I'd make a big wager that Tide will still have a place in laundry rooms all over the world.
- Heinz (NYSE: HNZ). The company is more than ketchup, but the backbone of this $17 billion food giant is -- hat-tip again to Interbrand -- a single brand that's estimated to be worth $7.6 billion. While the technology for delivering music may be totally upended in the years ahead, consumers' simple enjoyment of Heinz's perfectly crafted tomato ketchup is unlikely to be made obsolete through technological innovation.
Know thyself, Fool
This isn't to say that investing in young, innovative companies is bound to fail. Investors like Fool co-founder and Motley Fool Rule Breakers advisor David Gardner have shown that an approach that identifies huge markets and big potential can be quite successful. Nor is it to say that investors following in Graham's footsteps and focusing on more dependable and predicable companies can ignore the potential for the winds of change to blow.
Instead, the point is that all investors need to have a keen understanding of the power of time and their own stomach for investing in companies that are more exposed to rapid and drastic change. Both investors like David, who see opportunity in companies like Netflix, and investors like me, who prefer blander fare like Heinz, can be successful. However, those who don't have a healthy respect for Father Time and the havoc that he can wreak are almost inevitably going to be kneecapped by that grouchy old curmudgeon.
With that in mind, if you're a boring-company value investor like me, there's a good chance you'll like what you find in The Motley Fool's special report "Secure Your Future With 11 Rock-Solid Dividend Stocks." You can grab a free copy by clicking here.
