I’d like to take a step back today and look at the investing world in a more abstract way. I often find the investing community to be too focused on the minutia of quarterly movements and precise calculations. On the other hand, they are woefully uninterested in building their overall business acumen. Long term investment works best when you focus on being a business analyst, rather than just a stock analyst. The challenge is too great if you can’t see the world through the correct frame, so it is important to work daily on a term I’ll call Crafting Your Lens.
If you want to be successful, you have to start viewing the world differently. You can’t merely be a passive observer, but rather an active analyst throughout the day. Each and every day is comprised of thousands of moments you can use to build up your investing knowledge. Let’s start with one simple task you can do today to start crafting your lens!
Breaking things down into their smallest parts and recognizing where things come from is imperative. How about we take a look at the contents of my bathroom? I have a pretty typical young adult male setup. My toothbrush and toothpaste are both made by Crest. I have Listerine mouthwash and I use Old Spice deodorant. My razor and shaving cream were both made by Harry’s. My hand soap is made by Softsoap. In the shower I have Head and Shoulders shampoo and Dove body wash.
With that information, we can do a little digging. A quick Google search will tell you that Crest, Old Spice and Head and Shoulders are all Proctor and Gamble subsidiaries. Listerine is manufactured by Johnson and Johnson, Softsoap is a Colgate Palmolive company, and Dove is owned by Unilever. That means the only items I own not being produced by a mega conglomerate are made by Harry’s. Harry’s along with their competitor Dollar Shave Club are recent entrants into the world of shaving. They have turned the industry on its head and broken up the near complete monopoly owned by Gillette(another Proctor & Gamble company), by selling razors at a fraction of the cost(another business lesson).
Simply acknowledging who produces the items you consume on a daily basis will make you a better investor. You can use that information as an avenue to finding potential investments. If a company is able to convince you to spend the money you have worked so hard to acquire, they are probably good at doing the same to others. Of course this does not automatically make something a good investment, but rather it is a good place to start.
This exercise can be done virtually anywhere, from schools to hospitals someone has to produce everything we use on a daily basis. I find the grocery store to be one of the more fascinating locations to study. You could teach an entire college course about walking through the grocery store and discussing all of the different dynamics at play. Head down any aisle and you will see product after product produced by massive companies. These companies pay large sums of money for premier placement in the store. You will always find top brands being sold at eye level, where they are within easy reach for a customer. Smaller brands can’t afford to pay for this placement and are stuck on the bottom levels.
Let’s look at an area of the store everyone is familiar with, the chip aisle. What do Cheetos, Doritos, Fritos and Tostitos all have in common? Well besides the fact that for some reason they all end in “os”, they are all made by the Frito-Lay corporation, the salty snack division of PepsiCo. The list doesn’t stop there, Pepsi owns a staggering amount of different brands ranging from Tropicana Orange Juice to Sabra Hummus. If you do a little bit more research you can find out that most of these brands started out as their own company, but through a series of mergers and acquisitions over the course of the last 100 years they have all come to be owned by Pepsi.
This same dynamic plays out in basically every industry. It is a little more obvious to see in consumer items we use on a daily basis, but consolidation into large corporations happens throughout the business world. Take Middleby for example. They dominate the field of commercial kitchen equipment. Each year Middleby acquires different products found within a commercial kitchen. From industrial sized ovens to huge ice makers, Middleby supplies restaurants all over the world.
Walking around and identifying where things come from is a simple step that anyone can take. You don’t need to be a genius, but just be intellectually curious and have access to Google(just one of many things that make Google such a great company). Take a few moments each day and just identify the items you come into contact with. Start crafting your lens and I promise it will start paying dividends.
Thanks for taking the time to read! Be sure to subscribe and follow along. You can find me on Twitter @TheGarpInvestor.