One Stock Forever, Part 1
14 March '10
For many years I've pondered a simple question: if I had to buy shares in just one company and hold them for over twenty years, which would I choose? Practically speaking, owning a stake in a single business is lunacy. Diversification is an essential component of successful investing; some masters opt for a highly concentrated portfolio with as few as a dozen companies, while others have consistently outperformed the market with shares in thousands of different business. The one thing they all agree upon is the criticality of diversification. That said, my seemingly pointless question challenges me to pare my most favoured investments down and down again to just one company. Since 1996 I've kept a journal of answers to this question, with a few lines of rationale for my opinion at that time.
The importance of time frame must firstly be explained. In the short term, efforts at predicting where a company's stock is headed are extremely risky. Individuals interested in trading (as opposed to investing - important difference) do not concern themselves with what a business does, who is running the company, the markets they operate in, or their financial well-being. Traders buy based on technical indicators with the intention of selling out within a few days. The stock market is a chaotic system, with companies' daily moves being dictated by thousands of factors unrelated to how their business is performing, hence the risk.
Investors, on the other hand, accept that profits take more than a few weeks to realise. They look for well-run businesses with inherent value which over the medium term will be unlocked. This can be done via two methods. Quantitative analysis is all about the numbers; the stuff reported in annual and quarterly accounts. With this approach you set about adding up the sum of the parts of a business, overlay valuation formulas and apply some logic to derive what the company's shares are actually worth. If they're undervalued by your calculations, then you buy on the expectation that over the months to years ahead, their shares will grow to your determined price. Qualitative analysis looks at non-numeric characteristics, such as management integrity and effectiveness, customer loyalty, brand value and a range of other stuff that cannot be reported in a balance sheet. Ideally, stocks that make it in to your portfolio should pass both a quantitative and qualitative health check.
When you consider the long term and very long term, that is multiple decades, it becomes apparent why numerical analyses becomes insignificant. Nobody could have used a balance sheet to predict a one thousand six hundred fold increase in Dell's share price between the first day of 1990 and the last day of 1999. The same goes for Berkshire Hathaway, Apple, Wal-Mart, Starbucks, Ryanair, McDonalds, Google, Microsoft and countless other massive companies. Many investors found quantitative value in these businesses when their shares were relatively new to the stock market, probably calculating 20%, 40%, or even 60+% potential upside. Based on their quantitative valuation, they bought in, sat tight, and sold out when 'fair value' had been achieved. On the other hand, individuals who looked beyond the numbers by concentrating on the long term business potential, did so by focusing on quality of management. The few who committed to holding these businesses' shares for multiple years were rewarded with life-changing wealth beyond any valuation calculations.
Now, after almost two decades of studying the market, following outstanding analysts, documenting my thoughts, writing articles and above all investing my own hard-earned cash, I believe the company I have in mind has the potential to significantly change the wealth profile of individuals willing to buy and forget about it for 20+ years. Remember - and this is important - in writing this piece I am not offering advice. Nothing I write on bullsense.com, or anywhere else for that matter, is investment advice. I am simply sharing my thoughts via a blog. It so happens that the company I'm referring to is my largest financial asset after my home and one I will be buying more of in the weeks, months and probably years ahead. As I write, I have a position in twenty-three different companies, so despite believing strongly in the company I remain diversified and will continue to do so.
Finally, the company's name is Steak 'n Shake. Do not underestimate this business's potential at first glance...when Warren Buffet took controlling interest in Berkshire Hathaway in the early sixties it was nothing more than a textile factory.
I've owned shares in Steak 'n Shake for almost two years and have committed to holding them as long as their CEO remains at the helm of the business. In the next few weeks I'll follow through on this piece by documenting my reasoning.
Note: As at 16 April 2010, Steak 'n Shake changed name to Biglari Holdings and the symbol from SNS to BH.
