Number One Secret of Great Companies
You wanna invest in a great company? You wanna find the stock that can double, triple, or quadruple your money in the next few years? And maybe best of all, you wanna sleep well every night for the next decade knowing your money is in good hands?
Well, I've got some ideas for you. Actually, it's just one idea. But this one idea comes to bear on basically all other aspects of what makes for a good investment. It's the one really big idea. The head honcho.
And it's such an obvious idea that when I tell you what it is, you'll say, "Of course that's true! How could it be otherwise?"
It's such as simple idea that anyone can use it. You don't have to know how many transistors will be on the next generation of CPU processor chips. And you won't have to know whether a dual core processor is faster than a quad core. You don't have to be such an expert on consumer trends that you can predict what the next restaurant or clothing trend will be. You won't ever have to evaluate the effects of interest rates on quarterly earnings per share.
In order to use this idea and ensure you are investing with the very best companies in the world, you just have to be able to read a few press releases. There's absolutely no reason to look at a quarterly report. Ever.
The funny thing is, not many investors really use this investment selection. Oh, they will say they use it. When I see big investors like fund managers interviewed on TV, they always cite this as one of their top five criteria, or whatever. But I know it's not actually a priority. Because if this idea were truly important, these big fund managers wouldn't own 100 or 200 stocks. They'd only own 10 or 12 stocks. Maybe 15.
The truth is, this idea is really rare.
My 89th Favorite Stock
The first mutual fund I ever bought had a good track record. It was 1999, and this fund had put up 20% returns for five years running.
I remember reading the prospectus. Or, I should say I remember starting to read the prospectus. My eyes glazed over pretty quickly. You see, this fund owned well over 100 stocks. I was familiar with maybe the first 10 or 12 names on the list. After that, no clue. And I wasn't going to look up 100 and some odd stocks...
I remember thinking, "Dang, that's a lot of stocks." But I was pretty new in the biz back then, and I figured the "pros" must know more about this than I do...
I'm more confident today. So I will confidently tell you that anybody who has an 89th favorite stock isn't doing this investing thing right. In other words, why put money in number 89 when there are 88 stocks you like better?
I've got about 30 stocks in my Wealth Advisory portfolio right now. A few of them are favorite stocks of my partner there, Jason Williams. A few more are likely to be sold pretty soon. So let's say I personally have 20 favorite stocks. 20 is a manageable number. I can keep up with what each company is doing. And I'd say the 40% average gain we have on each and every stock is proof that we've got a pretty damn good group of stocks in there.
About 85% of these stocks share one thing in common. It's this "big idea" I was telling you about.
Now, before I go on, I can tell you that I've sold a couple stocks out of The Wealth Advisory that I wish I hadn't. And the reason is basically because I didn't give this big idea enough credit.
I know. I know what you're thinking. How can you tell us you have this great idea when you don't even trust it yourself? OK, well, let me try and explain...
Winning and Losing with Boeing
I inherited The Wealth Advisory from its previous editor in late 2011. The portfolio was huge. Way too many stocks. So I spent my first month or so going through each and every stock to determine which ones were keepers.
I ended up with a handful. A few REITs, and Boeing. Boeing had everything I was looking for. It was right at the cusp of a massive growth cycle for airplanes. While demographic/geographic/economic growth was demanding new planes, Boeing was launching a new line of planes that offered up +20% efficiency: the Dreamliner.
Now, you don't just announce a new line of planes overnight. There's a lot of planning that goes into it. Boeing had been working on a 747 replacement since the mid-1990s. But 9/11 really catalyzed what was needed. And in 2003, the Dreamliner was announced. It has been a massive success.
Boeing's stock was between $65 and $75 when I determined it was a keeper. For several years, I consistently told The Wealth Advisory that Boeing had more upside than any Wall Street analyst realized. But it was Boeing's management that deserved all the credit. They are the ones who positioned Boeing for years of success.
In March 2016, Boeing was $180 a share. I thought that 218% gain was pretty good. So I recommended selling it. A little faith in Boeing management, and Wealth Advisory readers would be sitting on 434% gains...
So, that's my secret, my big idea about investing. Own companies that have great management and great CEOs. They are the ones who will grow their companies and your money to heights you can't even imagine.
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The Disney Lesson
Disney has had two good CEOs in a row. Michael Eisner was there 20 years, from 1984 to 2005. His biggest move was probably buying ABC/ESPN in 1996 for $19 billion. Disney shares were around $20–$24 at the time, with revenue around $14–$16 billion.
When Eisner left in 2005, revenue was up $7 billion to the $26 billion range. The stock was still mid-$20s. And then came Bob Iger.
Iger spent less — about $15 billion — to get Pixar, Lucasfilm, and Marvel. He's added over $20 billion in annual revenue. And the stock has tripled. All the while, revenue from ESPN has been slipping.
That's what a great CEO can do for your investment money.
Take a look at what happened to Domino's Pizza under Patrick Doyle. Shares were about $8 when he took over and launched that "we're sorry for sucking" ad campaign in 2010. Today, they are above $200.
Steve Jobs coming back to Apple. Howard Schultz coming back to Starbucks. Even Elon Musk at Tesla. These visionary CEOs made fortunes for their investors. (I have real concerns about the future for Musk and Tesla, but there's no arguing how far that company has come.)
I watched Nvidia be an also-ran for over a decade before its founder and CEO, Jensen Hsun Huang, finally hit it a couple years ago. And look what Nadella has done for Microsoft since he took over.
Not all superstar CEOs are headline-makers like those I've mentioned.
Right now I am very intrigued with AMD’s CEO Lisa Su. She's been on the job about three years. She's redesigned chip architecture. The stock has come a long way, but there are signs that AMD is on the verge of being a true competitor to Intel in the data center and server chip space and to Nvidia in the graphic and AI chip space. There could be a lot of upside for this stock if it continues to take market share.
It's tough to put an absolute list together for a great CEO. But like I thought when I first saw T-Mobile's John Legere, you know them when you see them.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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