Doc’s note: In today’s issue, we’re featuring an essay from my colleague and Extreme Value analyst Mike Barrett where he explains how everything you need to know about investing can be summed up in one sentence.
I know. It starts to sound like a broken record.
“Finding successful new investment ideas is hard work.” I (Mike Barrett) have said it a lot – and I’ve written over and over about what it means to put in that work.
But today, it’s time for a breath of fresh air – a simple and effective strategy for building long-term wealth that isn’t hard to understand or difficult to use.
Dave Sather, a successful Texas-based money manager and mentor to the value investing community, had the good luck to come across this strategy early in his career, back in the 1990s.
And today, I’m going to share it with you…
In an interview, the El Paso native recalled his chance conversation with a still-active money manager who was well into his 80s.
Sather was headed to New York to further his investment studies. Upon mentioning this, the elderly gentleman offered to save him the effort and expense by telling Sather everything he needed to know about investing in a single sentence:
“Eat ’em, drink ’em, smoke ’em, go to the doctor, and look good when you get there.”
Sather didn’t get it at first. “Come again?” he said.
The wise octogenarian then offered an explanation that went something like this…
“Eat ’em” is your food companies. “Drink ’em” is your beverage companies, milk, soda, beer. “Go to the doctor” is your medical companies, like Johnson & Johnson (JNJ). And remember, your wife will let the house get repossessed before she goes outside without having her hair done.
Though comical, this sage advice is still as relevant today as it was when Sather received it a quarter-century ago: Investing in businesses that 1) meet basic human needs like food, drink, and health care, 2) cater to vices like smoking, eating candy, and drinking alcohol, and 3) supply beauty products that help women look their best can be a great way to build long-term wealth.
Amazon (AMZN) founder and CEO Jeff Bezos opened his 2014 letter to shareholders discussing “dreamy” businesses. Many companies operating in the three categories noted above meet Bezos’ definition…
A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.
Dreamy businesses sound a lot like “World Dominators,” a term Dan Ferris coined a decade ago for our monthly service, Extreme Value. And buying World Dominators when they’re cheap has worked out well for our readers over the years.
A key trait of “eat ’em, drink ’em, smoke ’em” businesses is durability. Many of these businesses have been serving basic human needs for decades, such as Coca-Cola (KO), Altria (MO), McDonald’s (MCD), and Procter & Gamble (PG). Their durability enables patient, long-term-oriented investors to hop on and enjoy the ride for years and years.
Sometimes, investing isn’t hard work… It’s simply a matter of understanding basic human needs and desires.
Marry that understanding with a portfolio of “dreamy” businesses and you have a recipe for long-term wealth creation.
Doc’s note: Each month, Mike and Extreme Value senior analyst Dan Ferris look for the safest, cheapest stocks… and recommend buying only when the price is right. Click here to learn more.