Wednesday, November 19, 2014
That Idiot, Warren Buffett
Why this guy doesn't wise up and invest in Facebook is anyone's guess.
The press is at it again, pillorying Warren Buffett for buying Duracell Batteries. What a chump! Why anyone can see that the disposable battery business is dead, dead, dead - just like the newspaper businesses that he bought! What an idiot! Financial Journalists (themselves all successful investors) know the score - Buffett has lost his edge.
But of course, the old fox is craftier than he looks. And Financial Journalists are not very bright, and paid to write sensationalist click-bait, not real, sound, financial advice.
You see, there is value even in an old "legacy" battery brand like Duracell. And what the profitability of the company is, is not as important than what you paid for it. Disposable batteries will be with us for some time to come - they are in most remote controls, flashlights, and other small appliances. And people will continue to buy them, perhaps in declining numbers, as the years progress. But there is a solid business there, and if bought for the right price it can be a profitable one.
In a way, it is like tanker stocks, which I wrote about before. You buy stock in a tanker and you literally are buying a part of a ship. The company pays out all profits as dividends, over the years, until the tanker is scrapped and you get pennies back on the dollar for the stock. You lost money, right? Not exactly - over the years, you got back more in dividends that you paid for the stock. Stock price isn't everything - profitability is. The financial news people concentrate on stock price alone - which is a very misleading indicator of value.
The second half of the equation is while Lithium-Ion rechargeable batteries are replacing disposables in many applications, this does not mean the disposable battery people are asleep at the switch. You can, today, buy a rechargeable replacement for your disposable battery. However, they are expensive, and most people (such as myself) find it a hassle to remove batteries from a mouse or a remote control, plug it into a charging station, and then re-insert it into the device. For things like remotes, mice, smoke detectors, etc., it is just easier to replace them once a year.
And even if rechargables replace disposables over time, Duracell will be in a good position to attack that market, having the technological base and a solid brand name. There is value in these old-line companies, even if they are not as sexy as tech stocks.
Just as there is value in newspapers. People still read them, particularly in small towns, where you can't get local "news" off a website. There is a market for papers, albeit a declining one. Advertisers still love papers - car dealers still run their full-page ads. Here on the island, the real estate agents run their full-page ads on our little island rag sheet. If you buy a paper for cheap, your investment is small, and if it makes money for you, well, was that such a bad investment?
The key to making money on an investment is not whether it is trendy like a tech stock or a website, or whether it is sexy or interesting. The best investments are often companies you never heard of, who continue to crank out products every year, pay dividends, employ people, and do all that old-fashioned money-making. Not very interesting, sexy, trendy, or topical. But profitable.
Some of my best investments (with what little stock-picking I do) have been along these lines. United Technologies - making of jet engines and air conditioners. An old rust-belt company if there every was one. Or take Stanley Tool - pays a nice dividend, and the stock price just slowly floats up. Even dogs like Frontier Communications have their day. Turns out, some folks still stubbornly use those old landlines out the country.
And Avis car rental - a business that is 100 years old. Their stock went up 3000% since I bough it. Those who "invested" in ZipCar lost 50% of their investment. Avis ended up buying that company. Which was a better investment - the dowdy old company that everyone thought would go bankrupt with its "old school" ways? Or the trendy new company with its new business model, lots of press and hemorrhaging cash flows?
The list goes on and on. The winners are people who make car parts (Magna) or Cars (BMW) or tractors or aluminum or cheese or other stupid things we all need. The losers? Trendy high-tech stocks that were hyped in the paper - CREE, Syntroleum, and that sort of thing.
This is not to say that old-line stocks are always a good deal. Let me tell you about my "investment" in GM! But those can be the exception rather than the rule. My Ford stock, on the other hand, has done well.
The key is profitability, not trendiness. And to understand profitability, you need to understand how the company works. How do you do this? You can't. We don't have access to the analysts that Warren Buffett has, nor the data and information he can accumulate about a company. We don't have his experience to comprehend what it all means. Most of us rely instead on the shouting guy on TeeVee - and he has a track record worse than a monkey and a dart-board.
Of course, you can buy a piece of Buffett. His Bershire-Hathaway Class B stock is available for plebes to buy. Up 80% since I bought it in 2010 (and people were saying Buffett was through then!).
Stock picking is for chumps. And chumps are the first to run down folks like Warren Buffett. But for the time being, I'll give him the benefit of the doubt.
Because I just bought a 40-pack of Duracell AA batteries last week - and already have used four of them!