Stock Investing: Identification

The infamous Trans-Alaska Pipeline

Now that you've begun to see how much of that which surrounds us can be bought and sold (not the least cynical of viewpoints, I know) you can start getting to know the companies who make and provide these things. A good place to start is with something you're already keeping track of, whether you are doing it for investing purposes or not. For example, residents of Alaska have for many years received an annual dividend check from the state for what is considered to be that resident's share of revenue derived from the state's vast oil reserves. As a result, most Alaskans pay fairly close attention to the state's oil industry and the market swings pertaining to it. Naturally they are at least passingly familiar with all the oil industry giants and their impact on that dividend.

Personally, I try very hard to invest in companies I've done business with directly or whose products I've purchased. At the very least, I invest in companies which occupy industries I'm long familiar with. Most investors think that's too limiting, as the universe of public companies is vast and we as consumers tend to do business only with a few brands in the scheme of things-- and then, by definition, only with companies which do business with consumers. (Many businesses, of course, sell only to other businesses: component manufacturers, for example, sell primarily to other manufacturers. Many financial or technological services are provided only to corporations, and so on.) But I feel strongly that as a customer of a particular business, I am in a unique position to be personally familiar with its products or services, and with at least some of its corporate culture as well.

Front-end loader? Backhoe?

Let's say you get a tip on a stock, and let's assume it's for a company called Intuitive Surgical, which makes a sort of robotic surgical system which translates a human surgeon's hand movements into corresponding micro-movements of surgical instruments inside an operating room patient. Great company, making amazing products. But as I've never undergone that type of surgery, and I'm no doctor, I have no personal experience with the product or with the business. The same goes for Kyocera, a highly reputable manufacturer of ceramic industrial components. And for Caterpillar, which everyone knows makes those huge yellow pavers and backhoe loaders. I've never bought one, never driven one, never had a service issue with one. In all these cases, I must rely on the companies' balance sheets and income statements, their revenue projections, their analysts, their reputations, and my own assessment of their competitive environment. When I buy the stock of a company I've done business with, I have all of that-- which is a tremendous amount, all freely available, and I'll come back to that in another post-- plus an entirely new set of experiences, giving me an altogether more comprehensive level of familiarity with that company.

Let's look for a moment at Netflix. I started renting DVDs from them online back in 2003, when most folks were still spending a couple of evenings a month shuttling to and from the video store. I was stunned with the quality and simplicity of Netflix's service. (Enter a list of films you want to see into your online profile and they mailed them to you, up to 3 per month, sending you the next one on your list as soon as you send back the last, all postage paid). I knew intuitively that this thing would catch on, that the days of millions of people endlessly wandering the aisles at Blockbuster were numbered. I researched the company, learning what I could about their debt structure and their per-customer acquisition cost and their founder/CEO's background and so on. When I liked what I saw, I bought the stock. Then I waited 2 or 3 years for the stock to rise (I was way too early... a recurring theme in my investment history). I held onto that stock for the better part of a decade. Blockbuster was eventually sold for parts and then shuttered.

Remember that feeling?

All the research in the world would not have told me what is was to be a customer of that business, how it felt. It was astonishingly easy, and it was fun! Every time that red envelope showed up in my mailbox it was like I had received a mystery gift. It was an experience so good-- you've had these, I hope-- that it became something I wanted to tell friends about. Like those stories you hear about people who showed up at the car rental counter to discover there were inexplicably no Ford Tauruses available, would a Jaguar be acceptable? Not only did I want to continue to do rent movies from Netflix, but I wanted others to do so as well. And I wanted to own a piece of what I saw as a tiny business revolution underway, David going after Goliath.

That's what you're looking for. A business you can understand, for sure (if you can't explain what they do, how will you know when they cease to do it well, or start doing it differently?). A business with a strong financial and competitive position. A business with a superior product or service-- which you know firsthand because you've tried it. There are a ton of them: the stores you like to shop in, the shoes you prefer on your feet, the brand of computer you use or the kind of car you drive, the athletic apparel you prefer, the soda or coffee or spirits you drink, the detergent or toothpaste you use. Go with what you know. If you like what that company sells, chances are very very good that you aren't the only one, and if the company is well-run, the stock will withstand market pressure and competition and will rise over time. Which is exactly the point.