Chris Mayer: The First Rule of Compounding

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“The first rule of compounding: Never interrupt it unnecessarily.”

 - Charlie Munger

I love this Munger quote. (h/t to @LiviamCapital). I may have it pinned on my wall. (Right next to another Munger quote I have on  my wall: “The goal of investments is to find situations where it is safe not to diversify.”)

I thought about Charlie’s first rule of compounding the other day when a friend asked if I trimmed a position that has run quite a bit this year.

I haven’t touched it.

Why not? Shouldn’t I trim when something becomes “expensive”? Shouldn’t I put the money in something “less expensive”? Isn’t that what “active managers” do?

Chris Mayer: The Best Investors of All Time

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Who are the best investors of all time?

You probably thought of Warren Buffett or Peter Lynch or John Templeton or other renowned money managers, past and present.

But did you think of the Walton family, the Rales brothers or Jeff Bezos? 

Yes, we tend to think of them as entrepreneurs. But they do own stakes in public companies just like any of those other investors. In this case, the public companies are Walmart, Danaher and Amazon, respectively. The returns on these stocks have been, well... let’s just say they would be the envy of nearly any traditional money manager you care to name.

Let’s think about Sam Walton for a moment. He opened the first Walmart store in 1962 at the age of 44 (then called Wal-Mart). In 1970, he took the company public. The IPO generated nearly $5 million, which doesn’t sound like much these days. The Walton family retained ~60%, which put the overall equity at about $13 million. The Walton family stake was worth about $8 million.

Chris Mayer: A Tale of Bubbles Past

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Winter invites reflection. As I look back on the year, I am sure I am not alone in thinking 2020 has been unlike anything I’ve ever experienced. But in the stock market, at least, I do have a certain feeling of déjà vu.

In the course of cleaning out a section of my office -- something I have to do every once in a while or risk burial by books and paper -- I came across a stack of old magazines that make my point.

This magazine was called Technology Investor and it debuted -- I am not making this up -- in March of 2000. As you may know, that was the peak of the great tech bubble. The magazine had an eye-catching cover, as you can see.

The NASDAQ peaked on March 10, 2000. It was a Friday. And the close was 5,048.62. Then the party ended. The NASDAQ didn’t bottom until October 2002, after it lost 78% of its value.

Chris Mayer: Reflections on 100 Baggers

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“What is the key ingredient to a 100 bagger?”

Ah well, always the big question. In my view, the key ingredient is return on capital. That’s the gin. And the ability to reinvest is the vermouth. 

Now, return on capital is a vague term. And this is an area I am still refining. But broadly considered, the key ratios to consider include “return on invested capital,” or “return on capital employed” or “return on assets” or “return on equity” or… 

And since the road to 100 baggerdom is a long and twisty road with lots of hills and valleys, you can’t just do it one year. You want a business that can crank out those high returns year after year. That means you have to think about a lot of other things as well, like competition and growth potential and the ability to withstand economic cycles, etc.

Chris Mayer: The Scarcity of Industrial Land

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Here’s an idea I’ve been thinking about this week: the scarcity of industrial land near big markets. It’s getting harder and harder in the US to find land to build things like service centers for trucks, used car lots, warehouses and the like. Ergo, the companies that have consistently invested in land over the years have a massive advantage over those who have not…

I have two examples that show what I mean: Old Dominion Freight Lines (ODFL, which we don’t own - yet) and Copart (CPRT, which we do).

Chris Mayer: The Coffee Can Approach

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Chris Mayer, a friend of our firm who authors a well regarded publication titled Capital & Crisis, was kind enough to contribute an article for this edition of The World According to Boyar. 

His article touches on a theme we discussed in our latest quarterly letter: How investors can be their own worst enemies by focusing on short-term performance and selling stocks too early. 

This behavior is in part aided and abetted by the short-term focus of financial news outlets (with notable exceptions) and their desire to sensationalize stories to drive ratings and/or sell newspapers. This “noise” puts pressure on investors to take action each time a company they own temporarily stumbles or when there is geopolitical uncertainty that causes a near-term correction. 

In the vast majority of cases, however, the best course of action would be for an investor to stay the course. In this article, Mayer maintains that investors should focus on finding great investments and buy them with the intention of holding them for the long-term. He discusses a strategy called the “coffee can portfolio” advanced by long-time money manager Robert Kirby as a way investors could avoid the temptation to act.