Judging Quality: Which Cows to Buy?
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If investing can be compared to farming, then selecting stocks is analogous to choosing cows. When an investment fails to perform as expected, the question becomes, “Who spreads the manure?”
My schoolmate “Scott” runs a serious amount of money as an investment professional; his AUM are multiple orders of magnitude greater than the single-digit millions that we have in our family office. In addition to being a kind and thoughtful husband and father and a very capable investor of other people’s money, Scott is also a wickedly funny guy.
As we come up to this summer’s 60th reunion for our class of 1962, our chats and calls become more and more weighted down with gallows humor. Our most recent conversation was about the previous article I had written for Advisor Perspectives about our family office’s investing methodology. After I finished explaining how our family office members thought of ourselves as investment farmers, he reminded me that, in addition to having gone to the same secondary school, we also shared the experience of each having spent a summer in Vermont in the late 1950s working on a dairy farm. Then he asked a question.
“So,” he said, “you use a magic formula to decide how many Holsteins, Jerseys, and Guernseys to own. Who does the manure spreading?”
None of the Midwestern farms whose business histories our family office tries to emulate spent any time in the dairy business. They grew forage, corn, barley and then soybeans. But, I told Scott, if our family office farm were a dairy, we would be the buyers of the less commonly owned breeds: Brown Swiss, Ayrshire, and Milking Shorthorns. Our portfolio is off in its own small corner; what we own hardly matches the overall market. Measured by Google Finance, the 14 stocks we own are rated as 69% small companies, 31% medium dividend investments, and 38% medium P/E investments. The market capitalization of our biggest company’s common stock is less than $5 billion.