01/04 Kelly Letter Topics
Weekly market review
Seasonal rally
Abysmal manufacturing
Horrific housing starts
Crumbling consumer conf
Rising oil price
Obama's cabinet
Is the Fed a failure?
Platinum 5-star stocks
Market forecast on track
Oil price trends
When to short Treasuries
There's a school of thought in the investment business that we should buy what we like. That is, I should consider buying shares in the restaurants that I like, the makers of clothing that I wear, the makers of cars that I drive, and so on.
Is this a valid approach?
Ben wrote:
I've had my eye on Crocs (CROX) ever since their outstanding annual report sent their stock soaring. Honestly, after reading how much their revenue increased, I went to their website and bought a pair of their sandals. They were extremely comfortable and I was glad I bought them.
Now that I've had them for awhile, however, I've noticed that in the rain they are horrendous. Every single time it rains and I walk into a building, I slip. I even think about not slipping while slipping. It is almost impossible to walk on non-carpeted floors without slipping if you aren't 100% focused on keeping balance. I've fallen a couple of times in college buildings, and due to the embarrassment and annoyance, I won't wear the shoes again.
I was wondering what your opinion was about this situation. I like to test out products before I buy them, and I apply the same scenario to stocks. I didn't buy Radio Shack because every one I have been to was unhelpful, but bought Amazon.com because I loved their service. Both have worked out well for me.
Would a situation like mine, assuming that after fundamental analysis you aren't sure if the stock merits such a high P/E ratio, be enough for you to not buy? Unlike other shoes, I don't see people re-buying Crocs because of this slipping problem, and these companies thrive off of continued customer purchases on these consumer goods. This is one of the hottest stocks out there, so I assume you've taken a look at it, if only for a minute.
How should I take this into consideration?
As luck would have it, I've taken more than a passing interest in Crocs. The following is taken from the 2008 edition of The Neatest Little Guide to Stock Market Investing:
My mother and sister visited me in Japan in May 2006. My mother wore a pair of Crocs sandals that she raved about the entire visit as we walked around Tokyo and flower parks near my home in the countryside. She told me that Crocs were invented in Colorado, where we're from, and that everybody back home had a pair. When my friends in Japan saw the sandals, they asked about them, tried them on, and wondered if I would buy some for them on my next trip back to the States. An actionable tip? You bet. Shares of Crocs were less than $25 that May. In February 2007, they broke $58 for a gain of more than 132 percent in just nine months. I have a feeling Peter Lynch would love this story.
Since February, shares of Crocs have risen to a split-adjusted $114 as of yesterday's close. They split 2-for-1 on June 15.
Notice in my introduction to Crocs, I paid no attention to my own opinion, but a great deal of attention to the opinions of others. I've found that my own tastes are not generally part of the fat section of the bell curve where most money is made by companies. I live very differently than most consumers. I can't tell you who's hot in music now. I don't know what celebrities are dating whom. I haven't seen the latest Coke commercial. I couldn't care less which family makes the best choppers on TV, and I don't even know what it means to be a good chopper -- or care.
That, however, is a handicap as an investor. Far better to be the person in the know, hip, with it, tuned in on every level. The burden of the sensible misanthrope is needing to listen to all forms of inanity to know what ordinary folks -- whose spending habits keep the economy humming -- think, or at least where their non-thinking leads them to waste money.
One of my favorite examples is bottled water. What a brilliant capitalization of the non-thinking, herd mentality of people. It's a proven fact that all municipal water in America is safer than bottled water. City water is delivered conveniently through a faucet in the house and it's nearly free. Yet, people pay money to haul heavy water that's less safe than what's already in their homes.
Do you know that water used to be used as an example of a product that would be impossible to sell to people who already had it in their homes? It's true. People used to say, "Heck, that guy could sell people water." Apparently, that guy listened to them and did it.
As proof that stupidity has gotten the better of people on the water front, so to speak, look at how some states in the U.S. are considering banning the sale of bottled water because there's no need for the product and its popularity is contributing unnecessarily to greenhouse emissions from trucking an already available commodity around town to the gullible.
Ah, humanity.
Ben, it should be pointed out, strikes me as just the sort of sensible person whose habits come nowhere near reflecting the behavior of his peers. He's written to me many times and each note is a well composed, thoughtful piece. Immediately, we know he's not part of the 80% in the middle. Why, I bet he even drinks tap water.
Most young people buying Crocs for the hipness of them would pay no attention to their ability to grip pavement. No, no. Where appearance is everything, 'tis folly to analyze. If Crocs are popular among people, it's because they're cool looking, fun, have a zippy name, and are eminently decoratable (important to those who value creative piercings and "body art", a euphemism for what used to be called tattoos).
So, my first thought is that Ben's slip-sliding through the halls of his college is probably not a harbinger of the end of Crocs.
However, Crocs is in for eventual trouble for other reasons. It's Krispy Kreme all over again. No matter how much people love the product, it can't grow at this pace forever. The bloom will flee the rose. The thoughtless will be lured to another sheen in the distance, earnings will slow, the valuation of the stock will soar, and the price will implode. Seen it a thousand times; expect to see it again.
Too, the appearance of nearly identical footwear from competitors and utterly identical models from China, the copycat capital of the world, bodes ill for the Crocs gang in Colorado. The more they differentiate their models from their originals that put them on the map, the more they look like...a shoe company.
To the issue of whether or not one's own experience is a reliable guide when picking stocks, I'm afraid the only answer is: sometimes. Certainly it's better to like an experience than to dislike it. Both can be misleading, though.
Unlike Ben, I was pleased with RadioShack and it proved to be a wonderful turnaround story. One of our best-performing holdings right now is in the oil services sector, in which I have zero firsthand experience. I soured on Hewlett-Packard when I tried updating my old business calculator to the new version of the same model and found that it was poorly made, nowhere near as pleasant to use as my old one. Yet, the stock soared in the years following that discovery.
Really, the best way to get the word on the street is to ask for it. I'm lucky in that I can tap readers and subscribers for their opinions, which helps a lot. If I didn't have that, I would ask friends and acquaintances and strangers I met in the course of life for their opinions on the products of companies I was considering. If I saw somebody on a plane using a Dell notebook, I'd ask what they thought of it. If I saw somebody park a car made by a company I'm considering, I might ask what they think.
Better still, I'd turn to consumer polls to see what a larger group of people thinks. The risk of small sample groups -- and our own opinion is a sample of one -- is that they won't reflect the view of larger sample groups, which ultimately are the ones that matter in analyzing sales.
There are times when it takes more than knowing what the herd thinks. You want to know what the herd thinks, see why it's wrong, estimate when it will wake up to its mistake, and calculate the results of its realizing it had been wrong. This is Bill Miller's process for investing in Kodak, a company that everybody thought would be kaput after the invention of digital photography.
I'm afraid there's no easy answer to this one, Ben, except that thoughtful looks past one's own opinion are usually worth it.
