I recently attended an investment conference at a prestigious university in New York City. Many successful value managers were in attendance. During one of the breaks, I went into the refreshment area to get a cup of coffee. I joined a conversation with value managers who were exchanging ideas on a few companies.
Each one was sharing a favorite stock idea and, after mentioning the name of the company, rattled off every valuation matrix known to man! They started off with P/E, followed up with free cash-flow yield and continued on with enterprise value/EBITDA. After a few minutes my head was spinning.
Then it was my turn. “What’s your best idea?” they asked. I really didn’t want to share my best idea and told them that I keep my best ideas for the partners of my hedge fund. They asked if I could share any one of my top 20 ideas. I started telling them about Florida Rock Industries (FRK – Hidden Values Alert, October 2006). I mentioned the competitive advantage the company had with the frugal and conservative approach of management, which also owns a large percentage of the outstanding shares, and the nature of the aggregate (the stuff they build roads with) and cement business. Based on the reserves the company has in aggregates and its obsession with keeping costs down, over the next five to ten years it will be a company hard for competitors to beat.
They looked at me as if they felt sorry for me. While embracing the numbers side of investing, they seemed not to care much about the things that are difficult to value yet are paramount to a company’s long-term success, such as its competitive advantage and management’s attitude toward expenses. This was not what they wanted to hear. I didn’t supply ten different ways to value the company, nor did I talk about the company as if it was just a jumble of numbers.
When researching companies to buy, I try to find those that have wonderful businesses that will endure over time. Sure, paying the right price is important, and I do spend time figuring that out as well. It just seems to me that many investors forget about the importance of buying into a great business and focus instead on the comfort of formulas and numbers.
I try to keep in mind the importance of the business by recalling what Warren Buffett said when he lectured at the University of Florida’s School of Business (Oct. 15, 1998):
“The wonderful business—you can figure what will happen, you can’t figure out when it will happen. You don’t want to focus too much on when but you want to focus on what. If you are right about what, you don’t have to worry about when very much.”