As we continue to digest the ideas of Sven Carlin, as expressed in “Modern Value Investing: 25 Tools to Invest With a Margin of Safety in Today's Financial Environment,” we will identify several more tools that will help investors identify companies with a margin of safety.Â
Tool 13: Google and the search engines
Carlin’s 13th tool for better investing was the search engine Google, which is owned by Alphabet Inc. (GOOG, Financial)(GOOGL, Financial). The search engine changed our expectations and our approach to finding information for investing. There were other search engines before Google, but they tended to be elaborate directories and much of their content depended on self-reporting by companies and individuals.
Now, of course, “bots” routinely search the entire available Internet, sort that information into understandable categories, rank the results and deliver them nearly immediately. Google is not the only search engine, Bing (from Microsoft (MSFT, Financial)), for example, is a strong competitor, but just as the name Kleenex (part of Kimberly Clark (KMB, Financial) has become the generic name for any tissue, “Google” and “Googling” have become generic names for any online searching.
What Google brings to the investing world is instant access to vast new quantities of information about companies and markets. Where brokers once controlled—and charged for—stock information, it is now free or low-cost, and ubiquitous.
Getting back to Carlin’s ideas, he noted investors can Google companies for critical information, such as:
- Who manages a company: insight into management’s integrity, including how well they delivered on previous promises.
- The technology used by a company and its sector, as an aid to properly assessing risk.
- How the company treats its employees, as well as its reputation among its peers and competitors.
In addition, internet searches can help investors buy the products of companies in which they’re interested, “sometimes spending $20 on a pair of trousers will save you from losing thousands from a bad investment in a company that showed a lot of promise.”
Along the same lines, reviews on Google may turn up product information that helps with investment decisions. And then there is Google Trends, which shows the interest in a subject over time, based on searches carried out on the search engine. For example, if you have been wondering about the degree of interest in electric cars over the past 15 years, here’s the answer:
Trends will also show regions with the most and least interest; in this case, Hawaii and the West Coast states show far more interest than the rest of the country.
For investors, though, the biggest opportunity will be in gaging future interest in a product. In the case of electric cars, the chart shows interest has been relatively flat since early 2009.
Tool 14: The integrity of management
As Carlin said, “The quality of the management is key to a business.” Thus, the search for competent managers whose interests align with the interests of shareholders as much as possible. He added that the lower the expectations of management, the greater the margin of safety needed.
Since the rise to prominence of institutional investors (pension funds, mutual funds and other pooled capital), there is less of what Carlin called “ownership coherence.” Big funds owning literally thousands of funds do not have the same intensity of focus as individual investors with concentrated portfolios. In many cases, this means management controls the companies with little oversight from the owners, the shareholders. As a result, this can lead to practices such as growing a company for the sake of growth, which, in turn, can lead to bloated option rewards but nothing for shareholders.
As another example, Carlin pointed to share buybacks when the stock price is higher than book value per share. A temporary bump in the stock price may follow, triggering the granting of more options to management, but does not enhance shareholder value. In many cases, he wrote, a dividend would have been more beneficial, especially if it could be reinvested at a lower stock price.
In the same vein, there are managers who “invent business strategies” that benefit management more than shareholders. Carlin wrote, “Just remember that a CEO managing a company of 20,000 employees deserves a jet twice as big as one managing a 10,000 employee company.” Sometimes such a jump in the employee count can be made with just a single acquisition, shareholders be damned.
All of this leads to a simple piece of advice: “Investing can really be simple, if you buy a good business with quality management at a fair price, which needs to happen only a few times in your life.” The latter point Carlin made in this statement deserves more attention. An investor does not need to find a lot of good companies with these criteria if he or she takes a long-term view. For disciplined investors, this could be 10 to 20 companies.
In addition to time and effort saved, investors who follow this approach should beat the market. Carlin used Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) as an example, noting there have been many opportunities to buy its stock at prices below its reported book value. For more than half a century, Warren Buffett (Trades, Portfolio) has been living up to his goal to “properly allocate capital at the best possible risk reward rates for the benefit of all shareholders.” That makes him a manager of integrity, which, Carlin writes, “When it comes to integrity, there is no need to rush, sooner or later the market will push the price of wonderful businesses with excellent management to extreme lows.”
Those extreme lows do happen, especially when the rest of the market is chasing the newest investment trend, such as the internet boom of the 1990s or the jump into passive investing that occurred in the 2010s.
(This article is one in a series of chapter-by-chapter digests. To read more, and digests of other important investing books, go to this page.)
Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.
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