Buying 3 stocks
Hi Partner 👋
It’s time for another Portfolio Update today.
What’s going on with our companies?
And which companies are the most attractive right now?
Let’s dive in right away.
Mr. Market is in full speculative mode
We’re in very strange times right now.
No matter how you measure it, the market is very expensive.
Momentum is incredibly strong right now.
The gap between momentum stocks and low-volatility stocks has never been wider.
There’s also a lot of speculation in the market. Expectations are very high.
Analysts expect that the earnings of S&P500 will compound 24% annually for five years.
That’s double the historical norm and completely unrealistic.
At the same time, Mr. Market is completely ignoring quality stocks.
Here’s the spread between quality and momentum:
There are a lot of Quality Companies trading at decade low valuation levels today.
Think about companies like Mastercard, S&P Global, Novo Nordisk, …
Three types of businesses
This is a good moment to think about what kinds of businesses we want to own.
Back in 2007, Warren Buffett described three types of businesses in his annual letter:
The good
The great
The gruesome
1. The good
Here’s what good companies do:
Provide a lot of value to their customers
Have a competitive advantage
Why they are not great businesses?
They need to reinvest a lot of their earnings just to grow.
Buffett uses FlightSafety (flight simulator training) as an example.
The business had a clear moat, but to grow, it had to constantly spend millions on new simulators.
These businesses work on a ‘pay more to earn more’ model.
2. The great
Great companies have the following characteristics:
A strong moat
Excellent returns on capital
The ability to grow earnings without needing a lot of capital
An example? See’s Candies.
When Berkshire bought See's in 1972, the business needed just $8 million in capital to earn around $5 million.
Decades later, it was earning $82 million while needing only $40 million to run.
Because growth didn't require big spending on equipment or inventory, nearly all the cash could flow back to Berkshire to buy other great businesses.
A great business is like a savings account paying an extraordinarily high interest rate. One that climbs higher every year.
3. The gruesome
These businesses:
Grow quickly
Need a lot of capital
Earn little to no money
Airlines are the textbook example.
They don’t have moats.
They require huge amounts of capital.
And there’s constant competition, usually on price.
Only the best is good enough
Here’s what’s happening in today’s market:
The market is expensive
Has unsustainable earnings growth expectations
Is full of good and even gruesome businesses that are priced for perfection
That’s a dangerous recipe if you ask me.
Which is why we’re going to take the opportunity to focus even more on buying the very best businesses in the world.
Only the truly great businesses are good enough.
And today, it’s time to add to 3 companies.
Let’s dive into them right away.
