LETTERS FROM THE GLOBAL PROVINCE
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GP2Apr03: Wal-Mart Investing; Shopping Elsewhere
Junkyard Dogs. The New York Times kicked off the baseball season last Sunday, running an article on the money mechanics, which are now at the heart of pro ball. Michael Lewis, who knows too much about Wall Street, titles his vivid account of Billy Beane, the General Manager of the Oakland Athletics, scrounging for players, The Trading Desk, an apt pun since trading activities now dominate investment bankers such as Goldman Sachs as well as every other aspect of our economy, including professional sports. (See New York Times Magazine, March 30, 2003, pp. 34ff.) Beane and his sidekicks have put a value on every player who counts in the major and even minor leagues and have calculated the value of various trading strategies. That has allowed them to put together a serious pennant contender with a very low payroll (less than 1/3 of the Yankees $133.4 million tab), although it can’t quite grab them a pennant or World Series. They have achieved success of a sort by understanding the value of the walking wounded, picking up players in their 30s on a downhill slope, who still have a few serious innings left in them. They recycle the scraps in the junkyard, always buying cheap. The article is adapted from Lewis’s forthcoming book Moneyball: The Art of Winning an Unfair Game. Needless to say, Billy Beane is a far cry from Connie Mack and the glorious days of the Philadelphia Athletics.
The Wal-Mart Ethic. What we probably see here is another example of the Wal-Mart ethic. Wal-Mart now is probably the most influential force in business worldwide, a thought that was imparted to us by a former textile chief executive who has bumped up against the Wall more than once. Wal-Mart has mastered supply chain economics, which means it relentlessly beats on its suppliers for lower and lower prices, and then goes offshore for yet lower prices. The consumer gets pedestrian quality for prices that look cheap but often are a tad high for what’s delivered. The Company has become a large enough market force that it has created imitators in a host of industries. In business this has led to win-lose negotiations rather than win-win. Again and again, we are witness to dealings that threaten the very existence of manufacturers and other providers. As the former chief executive points out, it is not surprising that ethical lapses poison the whole marketplace, since this purchasing approach does not encourage trust and respect between buyer and seller. A side effect is that transaction costs, involving the use of lawyers, accountants, and other middlemen, have increased, cumulatively draining the economy.
Junk Investing. As well, professional investors have had to become junkyard dogs. Just a few years ago Warren Buffett had convinced himself to buy brand name companies like Coca Cola and Gillette. In his current annual report, he complains that stocks—generically—are still quite overpriced, even if some have fallen 70%, so he has gone to the sidelines. He is buying instead a few junk bonds where he can envision more attractive returns, even if he expects some of the bonds to go sour.
Like Wal-Mart and Buffett, substantial individual investors, too, must look for deep, deep, deep value in a market that will probably slide some more. However, they cannot and should not follow the tactics of the junkyard boys. We have said elsewhere that one should not try to emulate Wal-Mart’s business strategy, because it’s a slugging match that one cannot win. For many this is the time to go upmarket, not downmarket, offering high end products and somewhat stiffer prices.
Nor should individuals and smaller money managers try to invest in the same things that the billion dollar players do. Unlike Buffett and large financial institutions, they can buy niches and small companies since they don’t have to deploy so much capital. There are a number of companies that fly beneath Wall Street’s radar with reasonable earnings and respectable balance sheets that are too small for Buffett and too small for the investment banking houses. The nice thing about small companies and small niches ignored by the big fellows is that some of them don’t sink with the economy. The multinational giants like GE always turn down sooner or later when the economy is going through a bad patch.
In other words, big investors now have to be junkyard dogs. But smaller money managers and individuals can look at the companies that are ignored and find their way safely through volatile markets..
Global Bets. In America one has to look for deep value. Abroad one should look for ways to invest in economies that seem to be performing respectably. Maybe Australia. Possibly China if you or the company in which you invest has figured out how to get its money out of there. Or you can look harder for other small countries at the margin that are not quite as affected by the global slowdown. As we have said elsewhere, smaller nations count a great deal more since the end of the Cold War. They have more power on the world stage, and a few offer investments that promise stable returns. Once again, the rule is to look in the places the world is ignoring that just happen to have okay economies.
Alternate Investments. There’s a great deal of talk now about how overpriced equities and real estate are and how you have to migrate to alternate investments. This is a tricky business since the markets of gold, and commodities, and currencies operate by strange rules and can sink a novice. But with your savings account at the bank paying 2% or less, you have to take a look.
Probably this means picking one type of investment so you can get to know it. Go kick some tires. Perhaps you will find a way to buy a piece of the specialty tea business which is ostensibly growing 15% a year. But only after you have done a lot of looking around talking to retailers to see if the stuff is really flying off the shelves, reading tea-specific publications to see if the growth is due to a demographic trend or just a temporary fad, and tasting a lot of product to see if you are convinced it can become a way of life. You must read the tea leaves before you buy. Finally, you have to convince yourself that specialty tea (or whatever you pick) is still ignored by mainstream investors, so that you still have a chance to buy while the price is right.
With alternate investments, incidentally, you want to find a way to buy the best, not the cheapest. This has always been true of the art markets. We know of one Chicago investor who has done well in fine art because he never touches second tier merchandise, no matter how tempting. So this is a bit different from junkyard investing.
Investment Aids. Our thesis here is that safety and performance for investors putting out less than $100 million lies in acting like a small guy. We can prosper by looking at some companies, small countries, and small niche investments where we discover a little quality and consistency. We have recently added a section to the Investor’s Digest area of Global Province called Investment Aids and Investment Outlook. We hope they help you march to your own drummer, helping you evaluate investments that are not the talk of the town today that will earn you a penny tomorrow. See www.globalprovince.com/investordigest.htm.
Working with Winners. In his 2002 letter to the shareholders of Berkshire Hathaway, Buffett says his “managerial model” was Eddie Bennett, major league batboy circa 1919 and into the 1920s. He moved from the Chicago White Sox to the Brooklyn Dodgers and then to the fearsome Yankees, making a heap more money than your average batboy because he was working for the right team. “It’s simple,” says Buffett, “To be a winner—work with winners.”
That’s the lesson for small investors who may feel like batboys. Rather than trying to buy flawed merchandise on the cheap, look for winners—companies, countries, niche investments—that have not yet caught the eye of the behemoths. It’s a safer way to go.
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