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Looking at the Big Picture
Posted by: Charles Mizrahi (IP Logged)
Date: April 25, 2012 05:22PM
Back in 2000, a college graduate from one of the Ivy League schools was entertaining several job offers. He majored in journalism and computer science and graduated near the top of his class.
Most of his classmates were taking offers from companies such as The Wall Street Journal and The New York Times. They were easily sold on the job security and the prestige of working at companies that have been in existence for decades.
There was no questioning the reputation of the Journal or the Times. Both had the best writers, broke major stories, and had Pulitzer Prize-winning writers on their staff.
Our college graduate was also offered a job at both papers but was also offered one at company that was barely one year old. It didn’t have the reputation, awards, or brand recognition of the Journal or Times, but it did offer something else.
The company was based on technology that was going to change the way we use the Internet. He also saw that the future of newspapers, despite their grand past, was quickly coming to an end. He was able to see the big picture and came to the decision that the future of newspapers was limited at best, and the future of information was going to be on the net.
Instead of latching on to an industry that was on the decline, he opted to jump into an industry that had a tail wind. He took a job at Google… and the rest is history.
The same story could easily be told about a college graduate that took a job at Amazon.com in 1995 instead of Sears or Apple in 1996 instead of Gateway Computers. In all these cases choosing the industry that had a tailwind instead of a headwind made all the difference.
In his 2002 letter to shareholders, Warren Buffett wrote about Eddie Bennett, who started as a batboy in 1919 for the Chicago White Sox the year they went to the World Series. He then switched to the Brooklyn Dodgers, and they too went on to win their league title. Eddie then moved on to the New York Yankees in 1921. Over the next seven years, the Yankees won five American League titles. In 1927 players such as Babe Ruth and Lou Gehrig voted him a share of their World Series winnings.
Buffett said that the lesson is not how Eddie lugged bats, but “what counted instead was hooking up with the cream of those on the playing field. It’s simple — to be a winner, work with winners.“
The college graduate that chose Google over traditional newspapers, or Eddie Bennett, who had an eye for jumping to winning teams, both share something that can help you become a better investor — you need to see the big picture.
Big picture investments
You might know friends or relatives that were not the sharpest tools in the shed yet went on to achieve great financial success by being in the right place at the right time.
When you find an industry that has a tailwind, your objective is to find those companies that have rock-solid balance sheets and buy them when they are selling at bargain prices.
The aging population of the U.S. is a big-picture story. The baby boomer generation will have a huge impact on healthcare, drugs, nursing homes and any industry that caters to senior citizens. The U.S. Census Bureau predicts that by 2030, more than 72 million people will be over 65 years old… double their 2000 count.
According to the United Nations, the global population passed 7 billion on Oct. 31, 2001. Over the last 50 years the world population has doubled, and is continuing to grow. People are also living longer — the average life span has increased from 53 year in 1960 to 69 years in 2010.
Several stocks in our portfolio will benefit from this trend: Drugstore chain Walgreens (WAG), healthcare products distributor Henry Schein (HSIC), and pharmaceutical maker AstraZeneca (AZN)
Growing world population
For the first time in history in 2008, most of the world’s population lived in cities. Projections show that by 2050, more than 70% will be living in urban areas.
What is even more dramatic is the growth of the megacity — defined as metropolitan areas with a total population in excess of 10 million people. In 1975 there were only three megacities: Mexico City, Tokyo, and New York City. Now, there are 26 megacities throughout the world… three of which are in China!
As the world population continues to grow there will be more mouths to feed. Farmland will have to be more productive and farmers will have to squeeze out the highest yield they can per acre. Especially since there will be fewer people living in rural areas.
One of the stocks in our portfolio is CF Industries (CF) — one of the leading producers and distributors of nitrogen and phosphate fertilizers. Phosphate is essential for seed production, root growth, stalk strength, and other important plant functions. Potash improves water retention, yield, nutrient value, taste, color, texture and disease resistance of food crops.
It’s not often that such a dominant industry leader trades at an attractive price but when it does, you need to be ready to take advantage.
Our buy trigger was $140 per share, which was hit on November 25, 2011. Since then it has moved higher and closed at $182.78 on April 25, 2012. We’re up 35% — and counting — so far with CF Industries.
Since the housing bubble burst, Americans have been doing their best to stretch their dollar. Off price retailers of brand name apparel have seen their fortunes rise over the past five years.
Traffic count, margins, and sales have all headed higher in the face of recession and 9%+ unemployment. Companies in our portfolio that have taken advantage of this tail wind are: the nation’s largest and second largest off-price retailer of brand name apparel, TJX Companies (TJX) and Ross Stores (ROST). As of April 25, 2012, TJX is up +110% and Ross Stores is higher by +145% since we added them to our portfolio in August 2010.
Selecting financially sound companies when they are trading at bargain prices puts the odds in your favor. We want to avoid value traps — undervalued companies that continue to become more and more undervalued because they are in an industry quickly becoming obsolete.
When you could see the big picture and invest when there is a sustainable tailwind, success is pretty close to a gimmie.
Stocks Discussed: WAG, HSIC, AZN, CF, TJX, ROST,
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