Which Factors Matter
Just before the coronavirus lockdown, my Texas Lutheran University students competed in the Texas Investment Portfolio Managers Symposium.
Their focus and dedication had been impressive as the student managed portfolio from TLU had now outperformed the S&P 500 over the last one, three, five and ten years.
And for the third time in a row, Texas Lutheran defeated Rice, Baylor, Texas State and the University of North Texas.
Afterwards a finance professor from Rice took the time to offer a compliment.
He commented that the Texas Lutheran team was able to analyze an overwhelming amount of data and yet distill it down to the handful of components that truly mattered. In the process, the students effectively analyzed and managed their portfolio with impressive results.
Over the last twenty years society has flipped from a world in which information was disseminated slowly, if at all, to one in which we are bombarded with information and opinions from every possible source.
Although fast and broad data seems like a good thing, too much information creates different problems. Now the smart investor is plagued with knowing how to narrow down the terra-bites of data to the few nuggets that really matter.
A friend of mine has known Warren Buffett for more than thirty years. The two get together to discuss investing on a fairly regular basis. I asked him what was unique about these conversations. He said that no matter the topic, Buffett had the ability to narrow the focus to the handful of characteristics or data points that truly mattered.
This focused his mindset on the key elements that make a great business succeed. Once this was revealed it also made the intelligent investors mind work more efficiently as time and energy were no longer wasted on unproductive tasks.
Knowing how to focus your attention has never been more important than now. Due to the pandemic we have a front row seat to a structural pivot in the way we live our lives. In the process, this will change the economics of all business models.
In the new paradigm, some business models will benefit. However, many will fail. Both outcomes should impact the way you analyze and invest in businesses.
Consider analyzing an airline. Typically, you would do a thorough analysis of their financial statements and make a variety of assessments. You would look at routes, airport gate access and pricing power. You would analyze the amount and structure of debt. You assess revenue, cash flow and earnings and ultimately assess what type of return on invested capital can be expected.
Great. That process should still be about the same. The costs for flying and maintaining a 737 will be the same as will the routes and gates. You have the same debt structure.
However, it is quite conceivable that going forward, every other seat on a plane may be empty due to social distancing requirements.
As such, assume the average plane currently has three seats on each side of the aisle. At max capacity, you have six seats per row. However, in the new world order you are limited to filling only four of those six seats. As such, your revenue has just declined by one-third…even though you still have a similar cost structure.
This may significantly change the math and economics that matter going forward.
As you ponder investment dynamics in a socially distanced world, you can consider how a variety of industries may be impacted.
A few that come to mind are cruise lines, theme parks, concerts, restaurants, churches, sporting events, gyms, malls and traditional retailers.
Recognizing these changes, listen to how management is strategically identifying the hurdles and opportunities. What is their plan to operate efficiently in a socially distanced world?
Until we have an effective vaccine, we are forced to deal with the impact of coronavirus and social restrictions.
This may require health related initiatives such as screens between tables or workstations. It may result in more overhead for larger buildings or fewer people occupying existing facilities.
Industries may be forced to adapt to a new normal that uses virtual and online interactions. This may be true for medicine, education or many aspects of retail shopping.
Every industry will be affected in some manner. It is up to you to think about how business models and investment options will be impacted and plan accordingly.
As the intelligent investor thinks about all the variables in the new world, succinctly identify the characteristics that matter most and how they will impact your investment thesis.
Congratulations to Dillan Wendel (Wharton), Auriana Bird (New Braunfels), Esam Hijazi (New Braunfels) and Luis Green (Smithson Valley) for leading Bulldog Investment Company from Texas Lutheran University to their third straight victory. It is amazing what can be accomplished when you work hard, stay disciplined and know what really matters.
(L-R: Luis Green, Auriana Bird, Dave Sather, Esam Hijazi and Dillan Wendel)
Dave Sather is a Certified Financial Planner™ and owner of Sather Financial Group. His column, Money Matters, publishes every other week.