The pandemic forced many companies to shake things up. But perhaps because of these challenges, some of the most basic, “boring” companies on our radar have been making some of the most interesting changes!
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It’s a classic thought experiment. “Which came first: the chicken or the egg?”
Clearly, the egg came first; that’s where chickens come from! But, wait. Who laid the egg?…
There’s a similar conundrum found in our work. In business and investing, we like to look for strong companies—ones that spend wisely, save well, and try to build an enterprise that can remain durable across changes in the economy. Often, these companies must have a strong balance sheet (i.e., more cash than debt) in order to grow to the size of an industry leader.
Clients, in the early stages of the pandemic, we invested in some companies leading their industries. Our original investing thesis was that even if the virus took its toll and a worst-case scenario occurred, people would still need the staples.
People would still need groceries.
People would still buy meat.
People would still order prescriptions.
While we were sure these everyday items would be impacted by pandemic life, we also believed they would likely survive—in one form or another.
Now many of these market leaders have been able to use the resources of a market leader to continue to evolve and transform organically. They may seem like “boring” companies on the surface, but in times of challenge, they are acting like growth stocks: many have been the first-movers among their peers, making plans that could shift their whole industries.
And believe it or not, we bought some of these companies as bargains. So which came first?
It’s fun being us. Clients, we are always looking for opportunities. Are you seeing anything that we should be watching? Let us know. And when you want to know more about what this all means for your portfolio, call or write.
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Clients know we’ve been investing in different facets of the auto business for years. It is a vital industry. People need to go places, after all—to school, work, and play. The more we research, the more interesting the future becomes.
Here are some of the surprising things we have learned:
Going a mile in an electric vehicle, or a hybrid in electric mode, costs only three cents. Gasoline takes a dime. The seven cent difference adds up to $175 billion dollars annually in the US. 1
The idea of ‘autonomous vehicles’ or self-driving cars seems fantastic today. Rapid advances in radar, other forms of sensors, artificial intelligence, and communications are making the technology a reality. We will see it, at least in some form, in some places, in the not-too-distant future.
Engineers project that autonomous vehicles will experience a 90%-to-95% reduction in accidents compared to human-driven vehicles. We thought about what this could mean, and ran the numbers. Across the whole country, this means thirty thousand fewer traffic fatalities per year. Two million injuries would be avoided. In economic terms, $135 billion in property and human damage would be prevented every year, if the accident rate were reduced 90%.2
In a related development, the cost of solar electricity is falling about 10% per year3. This makes sense, because solar power is a technology and the price of technology tends to fall year by year. So the cost advantage of electric propulsion may grow even larger.
With these compelling economic factors, it is easy to forget that the price of electric vehicles is not yet low enough to be competitive with internal combustion engines. But as a client reminded us recently, “Wide screen televisions used to cost $12,000, too.” As volumes go up, prices will come down. We know how this works.
The benefits we’ve cited above amount to thousands of dollars per year, per household. This doesn’t count the time we might gain from not having to drive, or the significant health advantages from reduced vehicle emissions.
The prospects for a healthier, wealthier society are exciting. Change usually creates winners and losers. You know we will be studying these issues intensely and watching closely. Please call if you have questions or comments about how this may affect you.
1Calculated from US Department of Transportation figures
2National Transportation Safety Board statistics
3Farmer, J. Doyne & Lafond, Francois. How predictable is technological progress? Research Policy, 2016. Volume 45, Issue 3.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Those who know us best have probably noticed one of our investment tendencies. We lean toward those opportunities where we perceive a high probability they will work out over time. One of the hallmarks of our method is seeking bargain valuations . Quite often, these are in boring but essential industries.
One of our major current themes is the evolution of the automobile. It takes 3 cents worth of electricity to go a mile in an electric car or a hybrid in electric mode. But it takes 10 cents worth of gasoline. The seven cent difference figures out to $175 billion per year in the US1. The change won’t happen overnight, but the economics will only get more compelling over time.
Large global auto manufacturers appear to be trading at bargain prices. One of them has sold hundreds of thousands of hybrids. Another is launching the first all-electric vehicle priced at mass-market prices. Sophisticated suppliers that are bringing new things to the manufacturers also figure into our strategy. These companies are attractive, based on our traditional research methods.
There are other players, however, that do not fit our usual specifications. Silicon Valley is full of disruptive visionaries trying to turn the auto industry upside down. Maybe they are geniuses, and maybe they are nutcases. But if an upstart company can capture 3% of the new vehicle market over the next few years, the payoff may be considerable—or, they could go broke in the face of their many challenges.
A dollar invested could be lost—or could turn into many dollars. There are no guarantees here: this is more speculation than investment. This is what is meant by “asymmetric returns.” It probably won’t work out to where you could make only a dollar or lose a dollar—the potential gain and the potential loss would be symmetrical in that case.
One might consider a small investment in an upstart as a hedge on our other holdings—a way to cover all the bases. We’re not going to change our core investment philosophy. Speculative investments are not appropriate for all accounts, and they will never replace the timeless principles that shape the vast majority of our portfolios. This is an evolution in our thinking and methods and we thought we ought to keep you informed. If you would like to discuss these ideas or other parts of your situation, please write or call.
1. Figures derived from US Department of Transportation statistics and the American Petroleum Institute.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Investments mentioned may not be suitable for all investors.
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