"A lot of people think long-term investing is three weeks from next Wednesday, but when I talk about long-term investing I mean 5, 10, 20 years. During that length of time the market can experience ups and downs due to what I call "background noise." Events occur – hurricanes, wars, political instability, currency and bank crises – that make investors nervous and cause market volatility. It does get nasty at times, but it shouldn't cloud investors' judgments about thinking long-term. The key organ here is your stomach. Everyone has the brainpower, but not everyone has the stomach for it." ~ Peter Lynch [more]
There are value investments available in any market, but the value opportunities are not always glaringly obvious. The stock market has had a heck of a year, pushing many stocks to all-time highs. Recently I stumbled upon a business that I find very intriguing, despite the fact that the stock has had a substantial run-up over the past few years like many other stocks. I take notice any time I find a business with a quality and innovative product, a record of consistent earnings growth and cash flow production, along with an experienced management team. I think I have found that with Dorman Products. [more]
Netflix is proving it is not short on creativity and innovation; traits especially necessary in quickly evolving markets such as entertainment delivery. The thought of movies premiering on Netflix at the same time as they premiere in theaters is intriguing. Netflix has proven itself to be an innovative and game-changing business both with DVD delivery and, now, its streaming service, so nothing should be off the table. [more]
Lately I have been looking into 3D printing as an investment opportunity. I may be a little late to the game considering TMF has been promoting 3D Systems (DDD) for quite some time now, and the stock has already accumulated roughly 400% in the past two years. However, the technology for 3D printing is still relatively very young, especially in the realm of consumer/retail 3D printing. This point is demonstrated by the fact that bigger players, such as Hewlett-Packard, are yet to enter the market or are planning on entering the 3D printing market in 2014.
The two primary players in 3D printing, that are at least publicly traded, seem to be 3D Systems and Stratasys (SSYS). I am leaning toward 3D Systems, because the business has at least been able to turn a profit and produce positive cash flow. Both businesses have a nice chunk of cash, primarily from the issuance of new stock within the past 18-24 months. Neither company, from what I have researched, is very flashy with its approach. Both seem to have "senior" management teams (in other words, most top management is over the age of 60 years old), which I must admit is not what I initially expected.
3D Systems has focused on buying out various businesses within the industry, and certainly has the cash on hand to continue this approach for the time being. The key, of course, is that the company begins to generate sufficient cash flow through its internal affairs. Trading at a P/E of over 130, 3D Systems does not have the appearance of a bargain. The company is currently valued at $6 billion and is trading at an all-time high; even so, I am tempted to open an initial position in the business.
Some are speculating that 3D Systems or Stratasys could be a buyout target, perhaps by H-P, at some point down the road. A buyout of either company would require a hefty amount of change for any business, even H-P (which has had some difficulties with profitability and cash flow production over the past several years). In other words, I would not invest in either DDD or SSYS with the expectation of a buyout. It's not impossible, but should not be the primary reason behind buying or holding a position in the stock.
High P/E ratios are not an automatic sign of overvaluation. I don't recall a time over the past several years when Chipotle had a P/E ratio of less than 50. So long as a company is able to justify high ratios with growth in income, cash flow, market share, etc. higher valuation ratios can be warranted. 3D Systems, I feel, might be in this category. 3D printing is a burgeoning industry on a worldwide scale in both manufacturer and consumer/retail markets. [more]
I started investing at the ripe age of twelve years old, but had a lull in my uber-intense investing interest for several years as I entered college and experienced the whirlwinds of young adulthood. Plus, I had to catch up on episodes of Lost, The Office, and other fine arts. In all seriousness, I have always been interested in the process of entrepreneurship and investing and thankfully have thrived in a college environment that continues to cultivate those interests. I began seriously investing in stocks in 2006 and 2007, of course; perfect timing to experience what I call the “sledding effect:” a one-way roller coaster to the depths of market levels.
My investing interest renaissance as of late has helped reaffirm why I see teenagers, college students, and young adults as natural investors, if they would only realize it. Part of why I admire David and Tom Gardner, and their efforts to start the Motley Fool, is because they were looking to share simple investing knowledge and advice that is not taught in a high school or college classroom. I am in the process of completing my bachelor’s degree in Business Administration, and not one of my courses has offered the slightest tidbit into how you can start investing on your own. Keen students could certainly begin to deduct a path to pursue individual investing, but very little is done in the classroom to show how attainable (and down to earth) investing can be.
Young adults, whether in high school or college, are the cutting edge consumers. They popularized those incredible RAZR phones. They jumped on each new iPod. They opened the doors to the possibility of binge-watching TV shows through Netflix’s video streaming service. In short, they are the innovative customers of the future, and they don’t mind exploring and taking risks with new products that eventually are often embraced by wider society. These new products and services can range from iPods to a restaurant that builds burritos and tacos through an assembly line process. Now, imagine if these young adults went beyond the consumer mentality and began evaluating the businesses behind those products as potential investment opportunities.
Investing in what you know equates to buying what you know. People research a product and will buy what they know, what they enjoy, and what they appreciate. Investing should be practiced the same way, especially for individual investors who do not have the time or interest to sustain ongoing searches for the latest nanotechnology startup story in a developing nation. Investing becomes all the more natural when you invest in companies whose products and servicesyou use and appreciate.
Many investing success stories come from businesses who offer a product which appeals to the younger generation. Netflix, Apple, Chipotle… these are names that nearly every student will intimately know, even if they do not directly use the product. Is it any wonder, then, that those businesses have often been terrific long-term investments? Netflix, Apple, and Chipotle represent solid investments of the past several years, even if an investor purchased them before the 2008 recession.
From January 1, 2008, to today, Netflix increased in value by 1100%. Apple increased by 160%. Chipotle Mexican Grill increased by 242%. Remember, the timeline of these returns includes what is considered to be the worst economic slump since the Great Depression. Not bad for the five year returns of businesses which have become household names today, especially so for those under the age of 25.
For individual investors, and especially the younger generation, start (or amplify) your investing journey by evaluating businesses you know, love, and where you or your friends allocate your minimal consumer dollars when you get the chance. If you like a product, you may very well want to be an owner in the company behind the product. Oftentimes, the greatest investments are right in front of us in our day-to-day lives.
David K [more]
Today I opened a position in Lions Gate Entertainment (it’s near an all-time high, why not?). Lions Gate (LGF) is a relatively small rising star in the movie/television production and programming field, with hidden gems (low-cost, high-revenue projects) including the Saw franchise and, most recently, the ongoing Hunger Games franchise. Lions Gate has substantial debt and some irregular cash flow production, but the company has proven its ability to manage debt over the past several years while increasing margins. [more]
The past week has demonstrated one of the downsides of stocks, particularly from a risk perspective. Stocks are largely influenced by "systemic risk" or external factors, such as government actions (or shutdowns), interest rates, and other economic and political influences in the marketplace. The benefit for long-term investors, however, is that these shorter-term economic and political influences are not necessarily the determining factors on the long-term outcomes of a successful business. This is not to say that these issues are of no consequence or should be completely ignored by long-term investors, but long-term investors should primarily concentrate on business fundamentals (internal factors) rather than being swayed by shorter-term external factors.
Peter Lynch summed it up quite well: "There is always something to worry about." Thank goodness. Without the “worriers,” we would not have the benefit of short-term market irrationalities which cause the undervaluation of quality businesses. It is the actions of the "worriers" on Wall Street which provide the opportunities to pick up gems of companies at bargain prices. On the flip side, these can be the same people or forces to hype a business to a level that exceeds its intrinsic value.
I continue to reexamine and refine my investment strategy, because it is important to be able to refer to core set of investing principles when the market becomes especially volatile thanks to overplayed reactions to economic or political events. Without a consistent and principled investing strategy, external market forces will largely determine our investing decisions and we will hold little bearing over our investing decisions. Coca-Cola is a great example of a business that outlasted and even flourished in periods of the Great Depression. Investors in Coca-Cola would have been wise to focus on the fundamentals of the business even during one of the worst economic periods of the country’s history. Hindsight is 20-20, so why not try to learn from the examples of great businesses (and great investments)?
I write this partly for my own sake. In a market such as today’s, where many stocks seem to be flirting with 52-week or all-time highs, it can be easy to feel principled. However, once things turn south, it is amazing how quickly a principled strategy can be thrown to the dogs in an attempt to regain some sense of control. We live in unpredictable economic times; the government is increasingly intertwined with economic decisions and, therefore, market movements. Seven individuals, through the Federal Reserve’s Board of Governors, determine interest rate levels for the entire United States. The point is there is plenty of room for error from these bodies of consolidated political and economic power. In the short-term, stocks are largely at the mercy of these external or systematic factors. Volatility in both directions is guaranteed in the stock market.
My focus as an investor has evolved to narrow my investments to companies whose products and services I, or people around me, utilize in some shape or fashion. By focusing on investing in what you know, you can peel away the layers of external factors that cause the bulk of a stock’s short-term volatility and focus on the business behind the stock. By purchasing a stock, you are becoming an owner of a business. Why would you become an owner of a business that you do not truly understand, or whose products you or your friends don’t even use? I think it is helpful, particularly for smaller individual investors, to identify a strategy that concentrates on the business, and leave the worrying to others (there are plenty of worriers out there).
Focus on investing in businesses you understand, with products you or your friends enjoy, and of course with a sound financial and managerial situation. This approach lessens the influence of numerous external distractions on investing decisions, leaves the worrying up to professional worriers, and emphasizes a long-term outlook built upon the soundness of a business rather than the whims of short-term market forces.
David K [more]
Nothing "erks" me more, as an investor in individual stocks, than times when everyone feels like a star investor. Given the stock market's run over the past 6-12 months, just about anyone could close their eyes, through a dart at a board full of stock ticker symbols, and end up with a winning portfolio. Of course, it is difficult to deny the pleasure of checking your stock portfolio and seeing an abundance of the color green. For me, however, despite the initial giddiness of seeing green, this also raises questions.
There is a fine line, when considering buying stocks, between maintaining caution with a value investment approach and being so overly cautious that great opportunities fly on by. Recently I was interested in pulling the trigger to buy an entry position in Yahoo!, but was teetering back and forth; when the market seems to be doing so well that nearly everything is reaching new highs, I immediately become cautious. In the case of Yahoo!, I missed out at a purchase price of $27-$29, with the stock now above $34 within a relatively short period of time. While this can be frustrating, if you are more concerned over the price of a stock rather than confidence in the condition and fundamentals of the business, it is probably a good sign to hold off buying a stock.
The important thing for long-term investors to remember is this: a sound business is a sound business. Short-term price swings will usually mean very little in the grand scheme of things. For instance, I would have been wise to hold all of the Netflix position I purchased in 2007. Today I can hardly recall what were then dramatic 10%-20% price swings that occurred around Netflix's earnings reports. An individual investor today, however, would now appreciate holding Netflix through the volatility whether or not they purchased the stock at $19 or $23 in 2007.
In the short-term a 20% price swing can be difficult to stomach, just as it can be dreary to hold a stock that doesn't seem to be doing much of anything over the period of a few years. Sometimes we can forget that no stock is detached from a business; every stock represents ownership in a business. In order to maintain a consistent perspective, especially in times of questionable or volatile short-term movements in the market (which occur quite often), it can be helpful to treat each investment as a business, not just a stock. A simple but important distinction, at least for me.
Of course, long-term investors should not completely ignore the movements of the market or the price of stocks. A helpful approach in today's market, when many stocks are at all-time highs and you have a leery purchase finger, can be to purchase smaller entry positions in businesses with sound fundamentals, a strong management team, and other positive attributes in key areas. Start building or expanding your portfolio with small and attainable entry positions. Tom Engle (TMF1000) teaches this approach, which is a simple tool to build a diversified portfolio of strong businesses regardless of where the market's short-term irrationality might be placed.
My investment experience, which is reaching its ninth year since I started investing when I was twelve years old, is still relatively limited. Reflecting on my investment decisions has confirmed much of the above for me. Too often I let short-term volatility (in either direction), rather than focused concentration on the business fundamentals, dictate my investment decisions. Over the long-term, short-term volatility does not mean a whole lot. I don't hear of many people fretting over whether they invested in Coca-Cola in 1950 or 1951. In the end, business fundamentals are what count.
Just some musings on a Monday evening...
David K [more]