We were speaking at Latticework, an investment conference in London earlier this month, where one of the other speakers, one of Europe’s most prominent value investors, said that he does not believe in projecting what companies do more than two years out because nobody can know what will happen.
Good for him but we do. Short-term investors make money from buying at a discount to what they see today, whether they are mutual funds looking to outperform, hedge funds going long or short to generate monthly returns, or value investors looking to pick up businesses on the cheap because they are in difficulties, because of their markets or problems of their own,
Real companies do not make money in months, quarters, one year or two years. Real companies have strong competitive positions in good and growing markets, they have good managements who are have a track record (and an incentive) to generate long-term growth, strong balance sheets, the ability to invest in technology and innovation to strengthen their businesses and find new ways to grow, and the scale to buy competitors if they want to add to their businesses or avoid disruption.
That is what we call quality and that is why we make our money not from what happens today or even over the next two years, but from the compounding of a business over the long-term, when short term investors, investment banking analysts and others have long stepped away to find the next thing.
The risk for us is disruption of the business, by new technology and innovation, changing markets or preferences, by new competitors or by neglect of their own businesses. Take the Coca-Cola Company, which we wrote about earlier this year. Then we wrote that this was the year where Coca Cola, its flagship product for more than a century, one of the world’s most valuable brands, was transitioning from full sugar to sugar free. We noticed several years ago that Diet Coke, a category of its own, was being supplemented by Coke Zero, which imitated the real Coke flavour. This year we saw the Coke Zero can go from black to red with only a small black band at the top and the name from Coke Zero to Coke no Sugar. And here in the UK at least, this month saw the actual transition: Coke no sugar or sugar, it is the same thing, have it your way. Soon Coke will be the one without sugar and Coke Classic will be back with sugar.