Businesses and Businessmen
“You want to really devote as much time as possible to study the history of businesses and the history of great businessmen in the past.” —Li Lu
Post-election optimism returned to the stock market this past week, with the S&P 500 and Nasdaq rising about 1.7% and the Dow rising about 2%.
The highest returns usually come from finding great companies early—before they are great. So many of us are looking for that in the stock market. We want to invest early in the big winners of the future.
But that’s not easy. It usually takes great businessmen and a lot of luck for a small company to become a big business. So we study history to try and help us understand past examples, hoping we’ll gain some knowledge to help us in the future.
In studying history, we also realize that sometimes, already great businesses get overlooked. Maybe they are thought to be in decline and won’t be great businesses in the future. Or maybe they are just in an industry or sector that is out of favor with the majority of the investing public.
We don’t make stock recommendations in this newsletter, but to give an example of a potential company that may fit the example above, consider Nestlé. It’s on the list of names we look at near 52-week lows. It has an average return on invested capital since 1990 north of 13%, has diversified its product line over time, has a trailing dividend yield approaching 4%, and is trading at a forward P/E ratio just under 17x—lower than the overall market, and at just about the lowest multiple in a decade.
Maybe it’ll be a good investment from here, and maybe not. But in this bifurcated market, there are a lot of companies that look like they are better than the average S&P 500 company from a quality perspective—which are also available at better valuations. Maybe we’re once again about to enter a stock-picker’s market going forward?
“There is no better teacher than history in determining the future. There are answers worth billions of dollars in a $30 history book.” —Charlie Munger
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