Ideally, we investors would pick up brilliant investments like Walmart when it only has a handful or stores, or Microsoft before the PC software revolution really took off. But this is simply not possible for most of us. We only discover later in the day that these companies are so well run and so dominate their markets that they are destined to produce good dividends for shareholders.
Does that mean that you are always going to miss out unless you are lucky enough to have personal knowledge of a nascent Great? It turns out that there are opportunities to benefit from the continued rise long after millions of investors are aware of the company .
For example, by the 1980s everyone knew that Coca-Cola was a great brand and had terrific distribution. It’s shares were not obviously cheap relative to the market average PER based on past earnings.
But, in the eyes of Warren Buffett they were cheap relative to future profits to be boosted by raising margins and through international expansion. Berkshire Hathaway spent about $1.3bn buying 400,000 Coca-Cola shares between 1988 and 1994. Today those are worth over $25bn. (It was a similar story for 1930s investors in Coca-Cola, or those in the 1950s or 1960s).
Peter Lynch points to another great American company that was an excellent buy when it was very small, but was still a good buy once it was well-known, that of WalMart.
“People are in an unbelievable rush to buy a stock. I’ll give you an example of a well-known company. Walmart went public in October of 1970; 1970 it went public. It already had a great record and had 15 years’ of performance; great balance sheet. You could have waited ten years, saying you’re a conservative investor and you’re not sure this Walmart can make it. You want to check. You see them operate in small towns. You’re afraid, they only operate in seven or eight states. You want to wait until they go to more states. You keep waiting. You could have bought Walmart 10 years after it went public and made 35 times your money. If you bought it when they went public, you would have made 500 times your money, but you could have waited 10 years after Walmart went public and made over 30 times your money.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Lynch also cites Microsoft: “You could have waited three years after Microsoft went public and made 10 times your money…If you knew something about software (I know nothing about software) you would have said, “These guys have it. I don’t care who’s going to win, Compaq, IBM. I don’t know who’s going to win, Japanese computers. I know Microsoft MS-DOS is the right thing.” You could’ve bought Microsoft.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
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I'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk
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