Buy the Business, Not the Stock

Think more about Charlie's idea of buying a business rather than buying a stock. A reasonable valuation on a business can go to shit if the underlying business fails. Even if you find something with a huge margin of safety, the business can very easily collapse to competition or industry changes. It's a concept that you tend to think about for a second and say "yeah, that makes sense" but if you truly stop to dissect and invert the concept, more important than the price of any stock is the underlying value of the business you are buying. I know this sounds elementary but I just spent 5 minutes actually thinking about the statement and not just agreeing with it. 

To me, Facebook at any valuation is not as valuable in my portfolio as Wells Fargo at any price. Facebook is a 5 year old company in an industry that is subject to crazy breakthroughs and black swans. It's impossible to say where the internet will be in 5 years. I can much more confidently say that Wells Fargo will still have 10,000 branches and a trillion in AUM in 5 years. You say, "well what if you made this statement in 2006, you would have gotten whooped over the next 3 years". Which I did. But if you could have identified the worst offenders in the industry beforehand (Wachovia, Lehman, Bear) and bought WF through the downturn, your return would have trounced the market (WF up 300% off its 2009 low). And to that point, internet (tech) stocks have not faired so great over the last 5 years either. 

My point being: things people can not avoid using no matter what - banks, grocery stores, cars, fuel, coke, gum on the whole, should provide you with better businesses in the long run than things that can change - retail, internet, technology. I think they need to be bought at a reasonable price and if you can get them at a great price all the better but why should I clutter my portfolio with stocks that I hope will go up when I can load it with institutions that people must have no matter how living evolves over my lifetime? If I can load my portfolio with banks, X, FM, and KO their price may fluctuate but their underlying business is solid steel. And if they screw if up at some point (new coke, housing downturn, banking collapse, cars sucking), that should be an opportunity to pick up a great underlying business at a discount. 

This macbook air is absolutely amazing. Was I using it 5 years ago? No? Will I be using an apple product 5 years from now? Maybe. PNC is PNC. I was using them 5 years ago, I am using them today, and I will probably be using them 5 years from now. 

I noted on this in my previous post but I think in searching for a greater truth, most people have overlooked the message that Charlie and Warren are really trying to send. Quit over thinking investing. Models aren't needed. Calculus isn't needed. Beta isn't needed. Buy good companies at good prices and just go do something else. Its a tenant of Warren's to buy a company and not look at it for ten years. I think this should be a commandment. Revisit the company and industry once a year to make sure nothing material has changed. If not, ignore the stock price and carry on. Tdameritrade is the death of the value investor. Being able to check how much money one is making every 5 seconds allows emotion to enter an otherwise rational business decision. 

Having said, I am going to do something I never do and that is recommend to myself to review XLF in the future. The US banks are still coming off demolition in terms of earnings. They got nailed in the financial downturn. But the value of their AUM, brands, and earnings power in the future is remarkable. The whole XLF is trading less than book value. On the whole, owning American banks for the long run seems like a no-brainer to me.