June 2019: Investing Thoughts & More
A Tale of Two Portfolios
A recent article, by Mike Bird, in The Wall Street Journal attempts to create portfolios that cater to the consumption patterns found in two generations of Americans: Millennials and Boomers. "The Millennial portfolio" is comprised of the technological stocks in vogue with that age group, including Uber (UBER), Snap (SNAP), and Netflix (NFLX). At the same time, "the Boomer portfolio" contains stocks that meet older consumers’ needs, including Welltower (WELL) and Home Depot (HD). While it might be an interesting thought experiment, we think this is a particularly poor way to build a retirement portfolio. The major issue with building thematic portfolios is that little or no consideration is paid to valuation. Many of the themes presented in the article, including healthy food, new home formation, and senior-living facilities, are very popular today. High popularity often coincides with overpriced valuations, and paying too much for investments is a sure-fire way to ensure poor returns. Additionally, in our view, it is important to determine if a company will even benefit from the trends to which it is exposed. For example, it’s still too early to assume that Beyond Meats (BYND), the healthy food company mentioned in the article, will be the big winner if consumers choose to eat less meat. It is a near certainty that many companies, including legacy food companies and start-ups, will come out with copycat products, which could very well result in BYND’s profits being competed away. So, rather than build portfolios with a top-down, thematic approach, we instead evaluate stocks on a bottom-up basis. We try to answer three key questions: 1) Is this a high-quality company? 2) Is the stock attractively valued? 3) Is the management team willing and able to return cash to shareholders? Unless we can answer, “Yes,” to those three questions, we pass on an investment, regardless of what themes or trends may benefit a company in the future. By staying committed to our time-tested investment process, we believe we will continue to find profitable opportunities for our clients.
Noteworthy Articles We’ve Read:
"...careful buyers but careless sellers"
Most investors take a measured and careful approach when deciding what to buy, but recent academic research, as outlined in “The Economist,” illustrates that investors are too careless when it comes to selling.
Could hydrogen fuel cells be the future of long haul trucking? The CEO of Nikola Motor, an upstart truck developer, seems to think so. In our view, the company has a long road ahead (pun intended!) to convince current truck drivers of the benefits of hydrogen, but the potential opportunity is immense.
Sony & Microsoft
A strategic partnership between Microsoft* and PlayStation (which contributes 1/3 of Sony’s profits) is something that would have seemed impossible 10 years ago, but Sony and many other technology companies are learning that “if you aren’t spending billions of dollars a year on data centers, servers, and network gear, you can’t keep up.” For the three leading cloud providers, Sony’s loss is Microsoft’s, Amazon’s, and Google’s gain.
Fascinating (and interactive!) post on how viruses/knowledge/fashion spread in the world. This is long but worthwhile. The differences between rural and urban communities are particularly enlightening.
Is “digital waste” just as big of a problem as the industrial waste/pollution of days gone by? Well, probably not, but it is still a problem that requires careful consideration. This article does a good job outlining the challenges.
This company’s passion for (obsession with?) toast is…something. What it says about changing consumer preferences might even be more interesting.
Books We Liked:
The Attention Merchants: The Epic Scramble to Get Inside Our Heads
by Tim Wu
From daily newspapers and the original snake oil salesmen to radio/TV and the modern internet, the gathering (and exploitation) of our collective attention has been a very profitable industry for centuries. The quote, “If you’re not paying for the product, you are the product” will ring in your head the next time you sit through another 30 second commercial after this book. – AG
Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration
by Ed Catmull
The parts of this book that focus on the story of Pixar and how it came to be are wonderful, including the company’s humble beginnings in New York to eventual majority ownership by, in order, George Lucas, then Steve Jobs, and finally the Walt Disney Corporation, who acquired Pixar for $7.4 billion in 2006. The rest of the book, which focuses on managing creatives, did not resonate with me. – AG
We would be willing to bet that Bliss is America’s best restaurant whose home is a former filling station. Located in San Antonio’s burgeoning Southtown, minutes from downtown, Bliss features cool décor, an outstanding, creative “New American” menu and attentive, friendly service. Bliss is owned and operated by Chef Mark Bliss. Bliss sports the most elegant and enjoyable vegan platter we have experienced, a beautiful arrangement of legumes, greens and vegetables each individually prepared. The Lockhart quail is roasted to perfection, stuffed with spicy Cajun rice, and served with a sweet apple and onion compote. The braised wild boar is a hearty portion served with a variety of mushrooms and polenta. Oyster lovers will not be disappointed by Bliss’ variety of preparations. At Bliss, the quality of the food is matched by its careful presentation. Despite its humble beginnings, the setting is chic, and the patio is beautiful. Bliss is located at 926 S. Presa St. in San Antonio (210-225-9926, www.foodbliss.com) close to the King William historic district. – BH
*Microsoft is owned by the authors and in FFIC-managed portfolios.
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