Investing in Great Companies

At Ahara Advisors, we believe that investing in great companies is the easiest and most effective way to generate wealth.  Our approach can be summarized as follows:

1. Identify a great business

2. Buy stock if the price makes sense looking at the long term (3, 5, 10, 20 years).

3. Hold the stock

There are two facts about stock market investing many people don’t know:

• The median stock has underperformed cash (as proxied by t-bills) - between 1926-2019.  

• All of the gains in the US stock market (measured from 1926-2019) were created by a small minority (under 5%) of companies. 

The tricky part is to identify great businesses that are in that top 5%.  We look for the following:

Net Benefit to Society 

We look to invest in companies that provide a net benefit to society.  We believe allocating capital wisely helps drive productive behavior that helps drive higher standards of living for people.  We do not believe it is a zero sum game.

Investing in “good” companies can also be very good for one’s wallet.  When executing a buy and hold strategy, longevity is critically important, and companies that are aligned with society can have longer lifespans than companies that clearly do harm.  Society will, over the long arc of time, hold bad actors accountable, and conversely, will reward companies that add value.

There will be some companies that are bad corporate citizens but still provide excellent returns to their shareholders.  

We don’t care.  

We know we can make excellent returns from companies with pro-social business practices.  

Great Businesses 

Great businesses have a few major characteristics:

• they provide a great return on investment (ROI) for their customers and clients 

• they have compelling unit economics for owners of the business

• they re-invest and compound their business advantage over time

Return on investment is short-hand for a great product or service.  

Unit economics can be calculated in a number of ways, but usually we look at some combination of margins, customer retention and customer acquisition costs.  

There is a fly-wheel effect for providing great value to your customers while having strong unit economics.  Profitable growth allows a business to reinvest in itself and its value proposition, which further improves unit economics by increasing the quality of the product and the loyalty of the customer/client base.  This is what we mean by compounding ones business advantage over time.  

Great Management

A great business with great management is rare.  If you can find one for a reasonable price you should let it run and compound for you (until you no longer believe in management or the business).   Great management teams understand their own business well, and are focused on strengthening their moats by creating more compelling ROI’s for their customers/clients over time.  

• Amazon has invested huge sums of money into delivering goods faster to its customers and for less cost.  It has also consistently lowered the prices of its cloud offerings to its enterprise clients.  

• Apple’s first iPod cost $399 and could only play music stored on its hard drive.  Today Apple sells a smart watch which has all the capabilities of that original iPod, plus internet connectivity (cellular and wifi), phone calling, web browsing, messaging, an ECG, and will call 911 if you get into a car accident or slip on the ice, for the same price as that original iPod.  

• Microsoft, under the leadership of Satya Nadella, has moved all of its software to be platform agnostic and cloud based - enabling huge productivity boons for all of its office software clients.   

Poor management can ruin a great business in a host of ways (taking on too much debt, making an ill-advised acquisition, or acting in ways that misunderstand the true value of their business).  A common mistake is to “defend” a historically profitable business line at the expense of investing in providing a great service for their customers into the future (Innovator's Dilemma).   See Kodak in 2012, or one or more of the major auto companies a few years into the future.  

Time Is On Your Side

“Time is the friend of the wonderful business, the enemy of the mediocre.” 

•  Warren Buffett, Annual Letter to Berkshire Shareholders 1989

If we are lucky enough to pick a great company with great management (and one can only truly know in retrospect), the rewards of having done so are enormous.  A business growing its earnings at 10% over 10 years will have 2.6x the earnings at the end of 10 years.  And if it’s a little better (say 15%), it will have grown 4x.  If it can sustain a high growth rate, say 25%, earnings will be over 9x 10 years later.  Which is to say you are likely to do quite well in that stock pick.  

The key is not to tinker too much (ie, DO NOT SELL!). A lucky or good pick can drive meaningful wealth if you don’t. Someone who had bought modest amounts of Amazon, or Berkshire Hathaway, or Apple at the right time will have generated many times their purchase price, as long as they didn’t try to over manage their positions. I’ve made “tinkering/selling” mistakes many times. It’s enormously difficult to do nothing. Some people have a hard time not selling when the price goes down, and some people have a hard time not selling when the price goes up.