True story. A few of us who work on Motley Fool Hidden Gems were sitting around talking about a recent business decision by World Wrestling Entertainment
Steve Broido, Fool radio producer extraordinaire, who hadn't been participating in the conversation up to that point, leans over and, in his best Montgomery Burns voice, says, "Tasteless? Not if you like the taste ... of money."
We thought it a classic line lifted from some particularly quotable movie or, if it wasn't, that the line deserved a much wider audience and a shot at entering the national consciousness as a new catchphrase. But an attempt to more widely distribute a good line isn't much of a reason to write a column. No, the reason the line has stayed with me and is worthy of riffing on is that not only is there a large core of truth to it, but there's also a pretty valuable investing lesson disguised in it as well.
Well, do you like the taste of money?
Can you use the presence or absence of "taste" in a company's operations to help you make more money in the market? Absolutely, but perhaps not the way you think.
Let's look at three different descriptions of "the lack of taste": tasteless, lacking taste, and distasteful, each of which has slightly different shades of meaning, but only one of which will help you make outsized returns in the market, the kinds that helped Hidden Gems become the No. 1 performing newsletter in the country, according to Hulbert's Financial Digest.
1. Companies that are tasteless.
The definition for tasteless is "not having or exhibiting good taste," or, more usually, actively exhibiting bad taste. Think of the WWE, which has been a long-term disappointment for shareholders since coming public in 1999. Not that the company is entirely defined by tastelessness (some of my best friends are fans of the WWE), but it is certainly not averse to indulging in a dose of tastelessness from time to time as a means of drawing attention to itself. And that attention was certainly successful in helping launch a successful and highly publicized IPO, but like so many other high-profile IPOs, it has been followed by a disappointing second act.
Consider also how many investors banked on the sure-fire success of Sirius Satellite Radio
The problem for Sirius or WWE investors hasn't been that there's anything wrong with providing so-called tasteless entertainment; it's just that tasteless entertainment gets a disproportionate amount of attention in the media to its actual cash-producing worth. You're virtually always better off concentrating on companies out of the limelight than ones in it.
2. Companies with no taste.
Apple
How true, but you can't translate that insight into an investment thesis. The focus on style and elegance that Apple has brought to products has helped it enormously lately, but it has also cost the company for decades when it should have been concentrating on a better business model for its operating system. Jobs' prioritization of taste over actual business sense cost Apple for many years, while accruing enormous benefits to Microsoft. Be that as it may, it's that same sense of taste that made Pixar such a spectacularly good investment for Jobs and its shareholders before the company was sold to Disney
Microsoft's unbelievably strong cash flows over the years have not much been negatively affected by having (in Jobs' opinion) no taste. The supposed lack of taste has never dissuaded investors from being extremely interested in Microsoft's operations, and it's the lack of attention that creates an excellent opportunity for outsized returns in the market. Let's move on.
3. Businesses that are distasteful.
The definition of distasteful can be conflated with that of tasteless, but it's worth separating the two because it makes all the difference in your likely investment returns.
Distasteful things are ones you'd just rather not talk about in polite company. As Peter Lynch wrote in One Up on Wall Street, "Better than boring alone is a stock that's boring and disgusting at the same time. Something that makes people shrug, retch, or turn away in disgust is ideal." You know, like funeral homes, debt collection, or even kitty litter.
These are the businesses that just seem to blend into the background -- unobserved by most because they'd just rather not think about them in the first place. On the flip side, tasteless things mostly call attention to themselves and more often than not drive the prices of a company higher.
Consider the long-term results of death-care provider Service Corp.
|
Service Corp. |
380% |
|
Asta Funding |
660% |
|
Oil Dri |
206% |
Shrug, retch, turn away in disgust ... and then buy shares
Of course, these three companies had other catalysts working in their favor five years ago -- things like improving returns on invested capital and opportunities to take market share. One thing they uniformly lacked was buzz -- that's just the way it works with distasteful companies. And that's why as an investor, you should never shy away from an intriguing and improving set of financial results just because of other people's unease with how the company makes money.
There are dozens and dozens of academic studies that will show these are where the abnormal profits in the market are -- small companies, often with depressed stock prices, but for whatever reason not generating attention from investors. At Hidden Gems, we've been relentlessly pursuing those abnormal returns, and recommending stocks that, as a group, are up 52% vs. the market's 20% returns over the same time period.
If you like the taste of market-beating returns, join us today for a free 30-day, no-risk trial of Hidden Gems. We'll be happy to show you how we look for and find distasteful companies, and other ignored opportunities.
Bill Barker does not own shares of any company mentioned. Disney is a Motley Fool Stock Advisor recommendation. Microsoft is an Inside Value selection. The Fool has a disclosure policy that, if dared, would dress up in a bunny suit.
