it’s hard to know everything about everything

In a world with complex industries and worldwide markets, it’s impossible, as a practical matter, to know everything about everything. My experience is that being a mile wide and an inch deep is a recipe for disaster. It’s much better to know a lot–at the very least, more than the average institutional investor–about a small number of things.

So a big question for all of us is to figure out where we think we are likely to have an edge over the rest of the market. For me it’s IT and Consumer Discretionary. For what it’s worth, I also think a systemic weakness of professional investors is that as the latter become more successful, many tend to be seduced by their affluence. They become experts on luxury goods but lose any ability they may have had to distinguish among Home Depot, Lowe’s and Tractor Supply.

don’t be too quick to run the numbers

Industry structure can sometimes be more important than overall growth rates.

–in retail, for example, there are many segments to consider. From high average purchases to low, my list is:

luxury goods–heavily dependent on China

department stores (ugh!}

specialty retail

Target/Walmart/Amazon

supermarkets/convenience stores

dollar stores

local, non publicly-traded retail.

A key feature of retail is that consumers shift down from the top of this list during recessions and shift up during recoveries. So holding specialty retail during a downturn is not the best move, nor is loading up on dollar stores during recovery–unless you have supreme faith in spreadsheets that say the opposite.

relative market share

This is important to consider in almost any distinct market segment–meaning where competition is pretty much head-to-head. A segment with three main rivals, each with a 30% market share, is likely to be much more strongly price competitive than one that’s 40%, 25%, 10%, 10%, 10%. Personally, I’d either be looking for one of the plucky 10%s with an innovative market strategy or to invest someplace else.

strength of company management

This is a hard thing to figure out, but it can be very important.

Many years ago, I met a fellow refuge from the academic world, a historian with a PhD who was working for a niche consulting company. His firm wrote corporate histories. The idea was that founders are typically revolutionary change agents, but as companies mature, they can easily turn into collections of inward-looking bureaucratic bean counters. A company history might be a way to shake things up and encourage calculated risk-taking.

GM, for example, once dominated the domestic auto market with a 50% share. Like any US-based car maker, it benefitted from decades of government protection against better-made foreign offering. Despite all this, GM still ended up in bankruptcy during the financial crisis, and is now a business school case of corporate dysfunction.

I’ve sometimes found it enlightening to call the investor relations department at a company, explain that I’m a shareholder and would like to ask some questions. Companies with a really terrible corporate culture–I’m thinking specifically of Intel pre-Gelsinger and Disney, pre-Iger–have told me that they don’t speak to shareholders and that I should essentially purchase company information from a stockbroker.

I firmly believe that attitudes like this come straight from the top of the company. Employees dress like the boss, talk like the boss and act like the boss. And I think that companies that have forgotten about their owners present a substantial investment risk.

Another example:

Through the 19990s, I owned Microsoft stock in the portfolios I managed (all my own money was in them, too). It had been a spectacular performer. In early 2000, I went to a MSFT analyst meeting in Seattle as I was trying to figure out whether to sell the stock, which, trading at about $50 a share, was at a very hefty 70x eps. Two relatively small things struck me. Someone asked Bill Gates a real softball question–what did he think was the most important thing he had done at MSFT (as the CEO office was transitioning to Steve Balmer). Gates replied that it was that he had created jobs for his friends. Questioned about MSFT’s dramatic slowdown in eps growth under his watch, Balmer said that the 5% growth the company was experiencing was a significant positive achievement, implying he–and we–shouldn’t expect more.

It seemed to me both that neither man felt any sense of duty to the owners of the company and, more than that, neither seemed to even have the faintest idea that shareholders should enter into their thinking at all. And, of course, 70x for 5% eps growth was a joke. I sold the stock immediately.

I bought it back in 2014 at around $40, as Balmer was finally being ousted. MSFT which was then regarded as a value stock, had been under pressure from corporate raiders to do so for several years. The stock, including reinvested dividends, is up about 16x since then, in a market that’s up around 4x.