In 1994, I started working at Founders Funds, a Denver-based mutual fund company. We were across the street from Janus Funds, and a few blocks away from Burger Funds. There were other investment companies in the area too, but we all managed money the same way. We were all attracted to the same companies; namely those in the technology and communication sectors, because they had the highest prospects for growth. And in the late 1990s, we were there to witness and benefit from the Internet and Dot-com boom.
By the end of the 90s, we had some funds that were delivering returns of 100% per year to investors. The companies we bought inside those funds that performed the best were the ones that were the least connected to reality. In fact, there was a running joke among portfolio managers that at the first signs a tech company might turn a profit, it was time to sell and run for the hills. Investors much preferred the dream of something great to the reality of something potentially less exciting. These were the companies that started as scribblings on the back of napkins and were later funded by Bay Area venture capital. The people running these businesses had big ideas and bigger egos. That’s what investors wanted, so that’s what we gave them.
This was the investment world I grew up in. The average portfolio manager running hundreds of millions of dollars was in his late 20s. We set aside traditional ways of assessing value, because many of the tools we had learned didn’t work for companies with high growth and no earnings. We argued it was a new era for investing and the times had changed. We willingly changed with them. Our livelihoods were tied to the markets, and our advancement as analysts and portfolio managers was driven by our performance. We couldn’t afford to get left behind. So we bought the companies with the most exciting technologies. It didn’t matter that the economics of the businesses were questionable; we figured the management teams of these businesses would find a way to make a profit in the future, even if it wasn’t obvious how that might happen. It was a great strategy, and it worked well … until it didn’t.
After the Dot-com bubble burst, I learned my first hard-knock lesson about investing; I can’t pay any price for a company. Even when I really like what the company does, I have to determine what a share of the company should be worth and if it’s too expensive, I have to say, “No.” Certainly, this mindset has caused me to miss out on some investments over the years. I did not buy companies like Amazon early, or Tesla lately. But it also means I have avoided making some investment blunders. And I have found the experience of buying stabler businesses is better for investors in the long run; not only does it provide more consistent results, but it produces less anxiety.
Great companies are rarely “cheap.” To paraphrase Warren Buffett, “it’s better to buy a great company at a fair price than a fair company at a great price.” Some companies are cheap for good reason. We try to avoid those. Others, we have to be willing to pay a little more for. Costco (COST) is a good example. It may not be an exciting company, but Costco is a favorite among its patrons, the company’s customer service is great, and the products are terrific. Management of the company also has a sustainable plan for growth and they have delivered growth over time. And because of their membership program, they have good profitability and good cash flows, even through trying times like the 2020 pandemic, where supply chain disruptions and product shortages were the norm. Because Costco is exceptional in many regards, we might be willing to pay a little more for the company. But we can’t forget the lessons of the past; we still must be mindful of value.
~ Travis Raish, CFA